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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------
For Quarter ended June 30, 2002
Commission file number: 1-3285
3M COMPANY
State of Incorporation: Delaware
I.R.S. Employer Identification No. 41-0417775
Executive offices: 3M Center, St. Paul, Minnesota 55144
Telephone number: (651) 733-1110
------------------------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
On June 30, 2002, there were 390,014,808 shares of the Registrant's
common stock outstanding.
This document contains 48 pages.
The exhibit index is set forth on page 43.
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3M Company and Subsidiaries
PART I. FINANCIAL INFORMATION
3M Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(Amounts in millions, except per-share amounts)
(Unaudited)
Three months ended Six months ended
June 30 June 30
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Net sales $4,161 $4,073 $8,051 $8,237
------- ------- ------- -------
Operating expenses
Cost of sales 2,231 2,266 4,267 4,462
Selling, general and
administrative expenses 975 1,190 1,852 2,143
Research, development and
related expenses 269 283 533 561
------- ------- ------- -------
Total 3,475 3,739 6,652 7,166
------- ------- ------- -------
Operating income 686 334 1,399 1,071
------- ------- ------- -------
Interest expense and income
Interest expense 20 33 39 71
Interest income (9) (9) (18) (21)
------- ------- ------- -------
Total 11 24 21 50
------- ------- ------- -------
Income before income taxes
and minority interest 675 310 1,378 1,021
Provision for income taxes 210 94 437 332
Minority interest (1) 14 23 34
------- ------- ------- -------
Net income $ 466 $ 202 $ 918 $ 655
======= ======= ======= =======
Weighted average common
shares outstanding - basic 390.0 395.9 390.0 396.1
Earnings per share - basic $ 1.19 $ .51 $ 2.35 $ 1.65
======= ======= ======= =======
Weighted average common
shares outstanding - diluted 396.1 402.2 395.7 402.3
Earnings per share - diluted $ 1.18 $ .50 $ 2.32 $ 1.63
======= ======= ======= =======
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
3
3M Company and Subsidiaries - CONSOLIDATED BALANCE SHEET
(Dollars in millions, except per-share amounts) (Unaudited) Dec. 31,
Jun. 30, 2002 2001
---------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 665 $ 616
Accounts receivable - net 2,795 2,482
Inventories
Finished goods 1,067 1,103
Work in process 577 611
Raw materials and supplies 354 377
-------- --------
Total inventories 1,998 2,091
Other current assets 1,165 1,107
-------- --------
Total current assets 6,623 6,296
Investments 250 275
Property, plant and equipment 14,735 14,365
Less accumulated depreciation (9,183) (8,750)
-------- --------
Property, plant and equipment - net 5,552 5,615
Goodwill 1,070 1,012
Intangible assets 244 238
Other assets 1,222 1,170
-------- --------
Total assets $14,961 $14,606
======== ========
LIABILITIES
Current liabilities
Short-term debt $ 806 $ 1,373
Accounts payable 835 753
Payroll 476 539
Income taxes 678 596
Other current liabilities 1,391 1,248
-------- --------
Total current liabilities 4,186 4,509
Long-term debt 1,838 1,520
Other liabilities 2,557 2,491
-------- --------
Total liabilities 8,581 8,520
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 472,016,528 shares issued 5 5
Capital in excess of par value 291 291
Retained earnings 12,227 11,914
Treasury stock, at cost; 82,001,720 shares at
Jun. 30, 2002; 80,712,892 shares at Dec. 31, 2001 (4,791) (4,633)
Unearned compensation (272) (286)
Accumulated other comprehensive income(loss) (1,080) (1,205)
-------- --------
Total stockholders' equity 6,380 6,086
-------- --------
Total liabilities and stockholders' equity $14,961 $14,606
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
4
3M Company and Subsidiaries - CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six months ended
(Dollars in millions) June 30
------------------
2002 2001
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 918 $ 655
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 496 503
Changes in assets and liabilities
Accounts receivable (204) (114)
Inventories 160 (5)
Other current assets (28) (45)
Other assets - net of amortization (34) 36
Income taxes payable 72 112
Accounts payable and other current liabilities 85 285
Other liabilities 68 (73)
Other - net 63 86
- ------------------------------------------------------------------------
Net cash provided by operating activities 1,596 1,440
- ------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (363) (547)
Proceeds from sale of property, plant and equipment 25 22
Acquisitions of businesses -- (208)
Proceeds from sale of businesses -- 9
Purchase of investments (1) (7)
Proceeds from sale of investments 11 19
- ------------------------------------------------------------------------
Net cash used in investing activities (328) (712)
- ------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt - net (394) 516
Repayment of debt (maturities greater than 90 days) (417) (667)
Proceeds from debt (maturities greater than 90 days) 526 674
Purchases of treasury stock (705) (852)
Reissuances of treasury stock 359 326
Dividends paid to stockholders (483) (477)
Distributions to minority interests (58) (17)
- ------------------------------------------------------------------------
Net cash used in financing activities (1,172) (497)
- ------------------------------------------------------------------------
Effect of exchange rate changes on cash (47) 33
- ------------------------------------------------------------------------
Net increase in cash and cash equivalents 49 264
Cash and cash equivalents at beginning of year 616 302
- ------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 665 $ 566
========================================================================
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
5
3M Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The interim consolidated financial statements are unaudited but, in the
opinion of management, reflect all adjustments necessary for a fair
presentation of the company's consolidated financial position, results of
operations and cash flows for the periods presented. These adjustments
consist of normal, recurring items. The results of operations for any
interim period are not necessarily indicative of results for the full year.
The interim consolidated financial statements and notes are presented as
permitted by the requirements for Quarterly Reports on Form 10-Q and do not
contain certain information included in the company's annual consolidated
financial statements and notes. This Quarterly Report on Form 10-Q should
be read in conjunction with the company's consolidated financial statements
and notes included in its 2001 Annual Report on Form 10-K.
Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This standard reviews the
accounting for certain exit costs and disposal activities currently set
forth in Emerging Issues Task Force issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
The principal change relates to the requirements necessary for
recognition of a liability for a cost associated with an exit or disposal
activity. The new statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred versus the date of commitment to an exit plan.
This statement is effective for exit and disposal activities initiated
after December 31, 2002. The company expects the principal impact to be
the ultimate timing of when charges are recorded as opposed to the value
of the ultimate charge.
Effective January 1, 2002, the company adopted Emerging Issues Task Force
Issue No. 00-25 (EITF 00-25), "Vendor Income Statement Characterization
of Consideration Paid to a Reseller of the Vendor's Products". This
statement addressed whether certain consideration from a vendor to a
reseller of the vendor's products is an adjustment to selling prices or a
cost. This statement did not have any effect on the company's net income
or its financial position. This adoption resulted in a reclassification
of approximately $25 million of advertising expenses from selling,
general and administrative expenses to net sales for each of the years
1999 through 2001. This reclassification totaled approximately $6
million for the second quarter ended June 30, 2001, and $12 million for
the six-month period ended June 30, 2001. These adjustments were
recorded in the company's Consumer and Office Markets segment.
Effective January 1, 2002, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". This standard primarily addresses the accounting for acquired
goodwill and intangible assets (i.e., the post-acquisition accounting).
The most significant changes made by SFAS No. 142 are: 1) goodwill and
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indefinite-lived intangible assets will no longer be amortized; 2)
goodwill and indefinite-lived intangible assets will be tested for
impairment at least annually; and 3) the amortization period of
intangible assets with finite lives will no longer be limited to 40
years.
Effective January 1, 2002, the company adopted SFAS No. 144. This
standard broadens the presentation of discontinued operations to include
more disposal transactions, thus the recognition of discontinued
operations is expected to become more common under this standard. This
statement retains the requirements of SFAS No. 121 (Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of) to recognize impairments on Property, Plant and Equipment, but
removes goodwill from its scope. The adoption of SFAS No. 144 did not
have a material impact on the company's consolidated financial
statements.
Significant Accounting Policies
The accounting policies for "Property, plant and equipment," "Other
assets" and "Impairment of long-lived assets" in the Annual Report on
Form 10-K for the year ended December 31, 2001, have been superseded by
the new policies that follow. These policies were impacted by the
January 1, 2002, adoption of SFAS No. 142 and SFAS No. 144 (discussed
previously). The "Property, plant and equipment" policy did not change
significantly, but has been updated to include impairment policy
information that was previously disclosed under the separate "Impairment
of long-lived assets" policy.
Property, plant and equipment: Property, plant and equipment are
recorded at cost, including capitalized interest and internal engineering
costs. Depreciation of property, plant and equipment generally is
computed using the straight-line method based on estimated useful lives
of the assets. Buildings and improvements estimated useful lives
primarily range from 10 to 40 years, with the majority in the 20- to 40-
year range. Machinery and equipment estimated useful lives primarily
range from 3 to 15 years, with the majority in the 5- to 10-year range.
Fully depreciated assets are retained in property and accumulated
depreciation accounts until disposal. 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. Property, plant, and equipment amounts are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset (asset group) may not be recoverable. An
impairment loss would be recognized when the carrying amount of an asset
exceeds the estimated undiscounted future cash flows expected to result
from the use of the asset and its eventual disposition. The amount of the
impairment loss to be recorded is calculated by the excess of the assets
carrying value over its fair value. Fair value is generally determined
using a discounted cash flow analysis.
Goodwill: Goodwill is the excess of cost of an acquired entity over the
amounts assigned to assets acquired and liabilities assumed in a purchase
business combination. Effective January 1, 2002, with the adoption of
SFAS No. 142, goodwill is not amortized. Prior to January 1, 2002,
goodwill was amortized on a straight-line basis, ranging from 5 to 40
years. Beginning January 1, 2002, goodwill will be tested for impairment
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annually, and will be tested for impairment between annual tests if an
event occurs or circumstances change that would indicate the carrying
amount may be impaired. Impairment testing for goodwill is done at a
reporting unit level. Currently, 3M has identified 20 reporting units
under the criteria set forth by SFAS No. 142. An impairment loss would
generally be recognized when the carrying amount of the reporting unit's
net assets exceeds the estimated fair value of the reporting unit. The
estimated fair value of a reporting unit is determined using earnings for
the reporting unit multiplied by a price/earnings ratio for comparable
industry groups. The company completed its assessment of any potential
impairment upon adoption of this standard and determined that no
impairment existed at January 1, 2002. Prior to January 1, 2002,
goodwill was tested for impairment in a manner consistent with property,
plant and equipment and intangible assets with a definite life.
Intangible Assets: Intangible assets include patents, tradenames, and
other intangible assets acquired from an independent party. Effective
January 1, 2002, with the adoption of SFAS No. 142, intangible assets
with an indefinite life, namely certain tradenames, are not amortized.
Intangible assets with a definite life are amortized on a straight-line
basis with estimated useful lives ranging from 3 to 15 years.
Indefinite-lived intangible assets will be tested for impairment
annually, and will be tested for impairment between annual tests if an
event occurs or circumstances change that would indicate that the
carrying amount may be impaired. Intangible assets with a definite life
are tested for impairment whenever events or circumstances indicate that
a carrying amount of an asset (asset group) may not be recoverable. An
impairment loss would be recognized when the carrying amount of an asset
exceeds the estimated undiscounted cash flows used in determining the
fair value of the asset. The amount of the impairment loss to be
recorded is calculated by the excess of the assets carrying value over
its fair value. Fair value is generally determined using a discounted
cash flow analysis. Costs related to internally developed intangible
assets are expensed as incurred.
Goodwill and Indefinite Lived Intangible Assets - Adoption of SFAS No. 142
The goodwill balance by market segment as of January 1, 2002, and June
30, 2002, follows. Goodwill has increased since January 1, 2002,
primarily due to changes in foreign currency exchange rates.
Goodwill Jan. 1 Jun. 30
(Millions) 2002 2002
Transportation, Graphics and Safety $ 171 $ 181
Health Care 330 352
Industrial 20 20
Consumer and Office 19 19
Electro and Communications 366 377
Specialty Material 106 121
Total Company $1,012 $1,070
8
Goodwill and Indefinite-Lived Tradenames
Supplemental Business Segment Information
Three-month period ending
Amortization expense Mar. 31 Jun. 30 Sep. 30 Dec. 31
(Millions) 2001 2001 2001 2001
Transportation,
Graphics and Safety $ 2 $ 3 $ 4 $ 4
Health Care 4 6 6 6
Industrial 1 - - -
Consumer and Office 1 - 1 -
Electro and Communications 5 6 6 6
Specialty Material 1 2 1 2
Total Company $14 $17 $18 $18
Income taxes (3) (3) (3) (3)
Minority interest - (1) (1) (2)
Amortization - net of income
taxes and minority interest $11 $13 $14 $13
The impact of Statement No. 142 on reported results follows.
Goodwill and Indefinite-Lived Tradenames
Supplemental Consolidated Statement of Income Information
(Millions, except per-share amounts)
Three month Three month Six month
period ending period ending period ending
Jun. 30 Mar. 31 Jun. 30
2002 2001 2002 2001 2002 2001
Reported net income $ 466 $ 202 $ 452 $ 453 $ 918 $ 655
Add back:
Goodwill amortization, net -- 13 -- 10 -- 23
Indefinite-lived tradename
amortization, net -- -- -- 1 -- 1
Adjusted net income $ 466 $ 215 $ 452 $ 464 $ 918 $ 679
Earnings per share - basic
Reported net income $1.19 $0.51 $1.16 $1.14 $2.35 $1.65
Goodwill amortization, net -- 0.03 -- 0.03 -- 0.06
Indefinite-lived tradename
amortization, net -- -- -- -- -- --
Adjusted net income $1.19 $0.54 $1.16 $1.17 $2.35 $1.71
Earnings per share - diluted
Reported net income $1.18 $0.50 $1.14 $1.13 $2.32 $1.63
Goodwill amortization, net -- 0.04 -- 0.02 -- 0.06
Indefinite-lived tradename
amortization, net -- -- -- -- -- --
Adjusted net income $1.18 $0.54 $1.14 $1.15 $2.32 $1.69
9
The impact of Statement No. 142 on previously reported results
follows.
Goodwill and Indefinite-Lived Tradenames
Supplemental Consolidated Statement of Income Information
Twelve-month period ended December 31
(Millions, except per-share amounts) 2001 2000 1999
Reported net income $1,430 $1,782 $1,763
Add back:
Goodwill amortization, net 48 30 16
Indefinite-lived tradename
amortization, net 3 2 --
Adjusted net income $1,481 $1,814 $1,779
Earnings per share - basic
Reported net income $ 3.63 $ 4.50 $ 4.39
Goodwill amortization, net 0.12 0.08 0.04
Indefinite-lived tradename
amortization, net 0.01 -- --
Adjusted net income $ 3.76 $ 4.58 $ 4.43
Earnings per share - diluted
Reported net income $ 3.58 $ 4.45 $ 4.34
Goodwill amortization, net 0.11 0.09 0.04
Indefinite-lived tradename
amortization, net 0.01 -- --
Adjusted net income $ 3.70 $ 4.54 $ 4.38
Goodwill and Indefinite-Lived Tradenames
Supplemental Consolidated Statement of Income Information
Three-month period ended
(Millions except, Mar. 31 Jun. 30 Sep. 30 Dec. 31
per-share amounts) 2001 2001 2001 2001
Reported net income $ 453 $ 202 $ 394 $ 381
Add back:
Goodwill and indefinite-lived
tradename amortization, net 11 13 14 13
Adjusted net income $ 464 $ 215 $ 408 $ 394
Earnings per share - basic
Reported net income $1.14 $0.51 $1.00 $0.97
Goodwill and indefinite-lived
tradename amortization, net 0.03 0.03 0.04 0.04
Adjusted net income $1.17 $0.54 $1.04 $1.01
Earnings per share - diluted
Reported net income $1.13 $0.50 $0.99 $0.96
Goodwill and indefinite-lived
tradename amortization, net 0.02 0.04 0.03 0.03
Adjusted net income $1.15 $0.54 $1.02 $0.99
10
Acquired Intangible Assets
The carrying amount and accumulated amortization of acquired intangible
assets follows.
(Millions) Jan. 1 Jun. 30
2002 2002
Patents $241 $256
Other amortizable intangible assets 85 92
Non-amortizable intangible assets (tradenames) 52 56
Total gross carrying amount 378 404
Accumulated amortization - patents (91) (105)
Accumulated amortization - other (49) (55)
Less total accumulated amortization (140) (160)
Total intangible assets, net $238 $244
The table below shows expected amortization expense for acquired
intangible assets recorded as of January 1, 2002.
After
(Millions) 2002 2003 2004 2005 2006 2006
Amortization
expense $31 $28 $25 $20 $19 $63
The above amortization expense forecast is an estimate. Actual amounts
of amortization expense may differ from estimated amounts due to
additional intangible asset acquisitions, changes in foreign currency
exchange rates, impairment of intangible assets, accelerated amortization
of intangible assets, and other events.
RESTRUCTURING CHARGES AND NON-RECURRING ITEMS
During the second quarter of 2001, the company announced a restructuring
plan, which is discussed in the company's 2001 Annual Report on Form 10-K.
Under the restructuring plan, the company eliminated about 2,200 positions
during the six-month period ended June 30, 2002, and since inception has
eliminated about 5,700 positions. These positions represent a wide range
of functions throughout the company. Because certain employees can defer
receipt of termination benefits, cash payments can lag job eliminations.
The restructuring current liability as of June 30, 2002, totaled $126
million.
In the second quarter of 2002, the company recorded charges related to this
restructuring plan that reduced operating income by $148 million and net
income by $73 million. These second-quarter 2002 charges were classified
as a component of cost of sales ($91 million); selling, general and
administrative expenses ($56 million); and research, development and
related expenses ($1 million). Of these charges, $87 million related to
employee severance and benefits and $21 million related to accelerated
depreciation (incremental charges resulting from shortened depreciable
lives). Depreciation was taken ratably over the new estimated life for
those assets affected by restructuring-related downsizing or consolidation,
which in most cases was less than one year. These charges
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also included $40 million related to other exit activities, which included
incremental costs and contractual obligations for items such as lease
termination payments and other facility exit costs (such as demolition of
buildings, inventory disposals, other) incurred as a direct result of this
plan. The non-cash and long-term portion of the severance and benefit
liability totaled $21 million in the second quarter of 2002. This
primarily included special termination pension and medical benefits offered
to eligible employees, which will generally be paid out over their life
expectancies.
In the six-month period ended June 30, 2002, the company recorded charges
related to this restructuring plan that reduced operating income by $202
million and net income by $108 million. These 2002 charges were classified
as a component of cost of sales ($121 million); selling, general and
administrative expenses ($77 million); and research, development and
related expenses ($4 million). Of these charges, $111 million related to
employee severance and benefits, $47 million related to accelerated
depreciation (incremental charges resulting from shortened depreciable
lives, primarily related to downsizing or consolidating manufacturing
operations), and $44 million related to other exit activities. The
reclassification of deferred separation pay from the long-term portion of
the liability to short-term totaled $47 million. The non-cash and long-
term portion of the employee severance and benefits liability totaled $35
million, primarily related to special termination pension and medical
benefits offered to eligible employees, which will generally be paid out
over their life expectancies. It also included $2 million of non-cash
stock option expense. The non-cash stock option expense resulted from the
reclassification of certain employees age 50 and older to retiree status,
resulting in a modification of their original stock option grants for
accounting purposes, which triggers expense recognition.
The company expects no additional charges will be incurred going forward
related to this corporate restructuring plan. The costs incurred by this
plan, since inception in the second quarter of 2001, totaled $771 million.
The severance and benefit charges were taken in the quarter when management
approved the plans and after severance benefits had been communicated to
the employees. Communication of benefits to international employees
occurred in various countries during different periods, resulting in
severance expense over the entire course of the restructuring plan. Second
quarter 2002 employee severance and benefit charges of $87 million largely
related to international voluntary separation packages that were accepted
in the second quarter of 2002. Much of this second quarter 2002
restructuring activity related to Sumitomo 3M Limited, resulting in $18
million of non-recurring income being recorded in minority interest.
Minority interest represents the elimination of the non-3M ownership
interests.
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Selected information relating to the charges follows.
Employee
Severance
and Accelerated
(Millions) Benefits Depreciation Other Total
-------- ------------ ------- -------
Charges
Year 2001 $472 $ 80 $ 17 $569
First quarter 2002 24 26 4 54
Second quarter 2002 87 21 40 148
----- ----- ----- -----
Total charges $583 $127 $ 61 $771
===== ===== ===== =====
Restructuring liability
Current liability at
December 31, 2001 $185 $13 $198
First six months 2002 activity
Charges 111 47 44 202
Reclassification from
long-term portion
of liability 47 - 47
Non-cash and long-term
portion of liability (35) (47) - (82)
Cash payments (228) (11) (239)
----- ----- -----
Current liability as of
June 30, 2002 $ 80 $46 $126
===== ===== =====
In the second quarter of 2001, the company recorded charges related to the
current restructuring plan that reduced operating income by $397 million
and net income by $249 million. These 2001 charges were included as a
component of cost of sales ($141 million); selling, general, and
administrative expenses ($242 million); and research and development
expense ($14 million). In the first quarter of 2001, non-recurring costs
(recorded in cost of sales) included acquisition-related charges that
reduced operating income by $23 million and net income by $14 million.
RECLASSIFICATIONS
Certain prior-period balance sheet amounts have been reclassified to
conform to the current year presentation.
Due to the adoption of EITF 00-25 effective January 1, 2002 (discussed
previously under "Accounting Pronouncements"), certain prior-period
statement of income amounts have been reclassified to conform to the
current-year presentation, with no effect on previously reported net
income.
13
BUSINESS SEGMENTS
3M's net sales and operating income by segment for the second quarter and
the six-month periods ended June 30, 2002, and 2001 follow. The company
adopted EITF No. 00-25 effective January 1, 2002. This adoption resulted
in a reclassification of approximately $25 million of advertising expenses
from selling, general and administrative expenses to net sales for each of
the years 1999 through 2001, with no impact on operating income. These
adjustments were reflected in the company's Consumer and Office Markets
segment.
- -------------------------------------------------------------
BUSINESS
SEGMENT Three months ended Six months ended
INFORMATION June 30 June 30
(Millions) 2002 2001 2002 2001
- -------------------------------------------------------------
NET SALES
Transportation,
Graphics and Safety $ 994 $ 907 $1,888 $1,800
Health Care 927 854 1,798 1,683
Industrial 805 792 1,598 1,657
Consumer and Office 664 666 1,289 1,355
Electro and
Communications 504 582 967 1,188
Specialty Material 253 270 485 551
Corporate and
Unallocated 14 2 26 3
- -------------------------------------------------------------
Total Company $4,161 $4,073 $8,051 $8,237
- -------------------------------------------------------------
OPERATING INCOME
Transportation,
Graphics and Safety $ 244 $ 198 $ 456 $ 375
Health Care 217 190 439 355
Industrial 140 123 279 293
Consumer and Office 122 106 239 219
Electro and
Communications 84 77 139 145
Specialty Material 42 38 73 86
Corporate and
Unallocated (163) (398) (226) (402)
- --------------------------------------------------------------
Total Company $ 686 $ 334 $1,399 $1,071
- --------------------------------------------------------------
14
BUSINESS SEGMENTS (continued)
First and second quarter 2002 non-recurring charges (included in Corporate
and Unallocated) of $54 million and $148 million, respectively, principally
related to employee separation costs, accelerated depreciation charges and
other associated exit costs under the company's previously announced
restructuring plan. The restructuring costs are not recorded in the
individual business segments for internal management reporting purposes.
This enhances comparability and reflects management focus on ongoing
results.
Second quarter 2001 operating income includes non-recurring charges of $397
million (included in Corporate and Unallocated). These costs relate
primarily to employee separation costs under the restructuring plan. First
quarter 2001 operating income includes non-recurring costs of $23 million
recorded in cost of sales. These first quarter 2001 non-recurring costs
(primarily related to inventory acquired in business combinations that must
be recorded at fair market value instead of manufacturing cost and the
subsequent sale of these acquired inventories) totaled $10 million in
Health Care; $7 million in Transportation, Graphics and Safety; and $6
million in the Electro and Communications segment.
As previously discussed, the company adopted EITF No. 00-25 effective
January 1, 2002. The reclassified prior-period net sales in total
(including the $25 million annual reclassification impact) are summarized
as follows. The offset to the $25 million reduction in annual net sales
was reduced selling, general and administrative expenses.
Fourth Third Second First
(Millions) Year Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------
Consumer and Office
2001 $ 2,699 $ 668 $ 676 $ 666 $ 689
2000 2,823 702 747 690 684
1999 2,680 698 710 636 636
Total Company
2001 $16,054 $3,856 $3,961 $4,073 $4,164
2000 16,699 4,129 4,264 4,237 4,069
1999 15,723 4,040 4,015 3,879 3,789
DEBT ISSUANCES
In October 2000, the company filed a shelf registration with the Securities
and Exchange Commission relating to the potential offering of debt
securities of up to $1.5 billion. After the shelf registration became
effective, the company, in May 2001, established under the shelf a medium-
term notes program through which up to $1.4 billion of medium-term notes
may be offered. In March 2002, the company issued a three-year, $400
million, fixed rate note. The debt was swapped to a rate based on a
floating LIBOR index (1.68 percent at June 30, 2002). As of June 30, 2002,
$950 million of medium-term notes had been issued under the medium-term
notes program and another $56 million of debt securities were issued in
2001 directly from the shelf, aggregating $1.006 billion of outstanding
debt securities offered under the shelf.
15
EARNINGS PER SHARE and DIVIDENDS PER SHARE
The difference in the weighted average common shares outstanding for
calculating basic and diluted earnings per share amounts is attributable to
the potential dilution from the company's stock-based compensation plans
for the three-month and six-month periods ended June 30, 2002 and 2001.
Certain Management Stock Ownership Program options outstanding were not
included in the computation of diluted earnings per share because they
would not have had a dilutive effect (3.2 million and 3.3 million average
options for the three months ended June 30, 2002 and 2001, respectively;
4.8 million and 1.6 million average options for the six months ended June
30, 2002 and 2001, respectively). Dividends are paid quarterly to
shareholders and totaled 62 cents per common share in both the first and
second quarters of 2002, compared with 60 cents per common share in all
quarters of 2001.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS
The company uses interest rate swaps, currency swaps, and forward and
option contracts to manage risks generally associated with foreign
exchange rate, interest rate and commodity market volatility. For a
more detailed discussion of derivative instruments, refer to the
company's 2001 Annual Report on Form 10-K.
During the second quarter of 2002, the company converted a foreign
currency based pricing contract into a dollar based pricing contract.
This resulted in the discontinuance of a foreign currency cash flow
hedge. The company recognized a $10 million pre-tax loss (recorded in
cost of sales) related to this discontinuance.
The table that follows provides the amount recorded in cumulative
translation related to net investment hedging, and also provides cash flow
hedging instrument disclosures.
16
Three months ended Six months ended
DERIVATIVES June 30 June 30
Net of tax amounts 2002 2001 2002 2001
------------------------------------------
Net investment hedging:
Unrealized after-tax
gain (loss) recorded in
cumulative translation $(19) $ (2) $(17) $ 18
==========================================
Cash flow hedging
instruments in Other
Comprehensive Income:
Beginning balance $ 5 $ 13 $ 9 $ -
Net unrealized holding
gain/(loss)* (56) (1) (59) 24
Net (gain)/loss
reclassified to
earnings* 14 (6) 13 (18)
-------------------------------------------
Ending balance $(37)** $ 6 $ (37)** $ 6
===========================================
*Tax expense or benefit
Net unrealized holding
gain/(loss) $ 32 $ 1 $ 34 $(14)
Net (gain)/loss
reclassified to
earnings (8) 4 (8) 10
** Based on exchange rates at June 30, 2002, the company expects to
reclassify to earnings over the next 12 months a majority of the cash
flow hedging instruments after tax loss of $37 million (with the impact
largely offset by foreign currency cash flows from underlying hedged
items).
STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) INFORMATION
The components of the ending balances of accumulated other comprehensive
income (loss) are shown as follows.
- ----------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Jun. 30 Dec. 31
(Millions) 2002 2001
- ----------------------------------------------------------------------
Cumulative translation - net $ (969) $(1,152)
Minimum pension liability adjustments (74) (74)
Debt and equity securities, unrealized gain - net - 12
Cash flow hedging instruments,
unrealized gain (loss) - net (37) 9
- ----------------------------------------------------------------------
Accumulated other comprehensive income (loss) $(1,080) $(1,205)
======================================================================
17
The components of total comprehensive income (loss) are shown as follows.
Income tax effects for cumulative translation are not significant because
no tax provision has been made for the translation of foreign currency
financial statements into U.S. dollars. Reclassification adjustments
(other than for cash flow hedging instruments which were discussed in the
"Accounting for Derivative Instruments" section) were not material.
- -------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME Three months ended
June 30
(Millions) 2002 2001
- -------------------------------------------------------------------
Net income $ 466 $ 202
Other comprehensive income (loss)
Cumulative translation - net of $13 million
tax benefit in 2002 and $2 million tax
provision in 2001 192 (62)
Debt and equity securities,
unrealized gain (loss) - net of $3 million
tax benefit in 2002 and $4 million tax
provision in 2001 (6) 7
Cash flow hedging instruments, unrealized
(loss) - net of $24 million tax benefit
in 2002 and $5 million tax benefit in 2001 (42) (7)
- -------------------------------------------------------------------
Total comprehensive income $ 610 $ 140
===================================================================
- -------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME Six months ended
June 30
(Millions) 2002 2001
- -------------------------------------------------------------------
Net income $ 918 $ 655
Other comprehensive income (loss)
Cumulative translation - net of $12 million
tax benefit in 2002 and $2 million tax
provision in 2001 183 (248)
Debt and equity securities,
Unrealized gain (loss) - net of $7 million
tax benefit in 2002 and $9 million tax
benefit in 2001 (12) (13)
Cash flow hedging instruments, unrealized
gain (loss) - net of $26 million tax benefit
in 2002 and $3 million tax provision in 2001 (46) 6
- -------------------------------------------------------------------
Total comprehensive income $1,043 $ 400
===================================================================
18
OTHER
Discussion of legal matters is cross-referenced to this Quarterly Report on
Form 10-Q, Part II, Item 1, Legal Proceedings, and should be considered an
integral part of the interim consolidated financial statements.
PricewaterhouseCoopers LLP, the company's independent accountants, have
performed reviews of the unaudited interim consolidated financial
statements included herein, and their review report thereon accompanies
this filing. Pursuant to Rule 436(c) of the Securities Act of 1933
("Act"), their report on these reviews should not be considered a "report"
within the meaning of Sections 7 and 11 of the Act and the independent
accountant liability under Section 11 does not extend to it.
19
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of 3M Company:
We have reviewed the accompanying consolidated balance sheet of 3M Company
and Subsidiaries as of June 30, 2002, and the related consolidated
statements of income for each of the three-month and six-month periods
ended June 30, 2002 and 2001, and of cash flows for the six-month periods
ended June 30, 2002 and 2001. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States of America, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying interim consolidated financial
statements for them to be in conformity with accounting principles
generally accepted in the United States of America.
We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as
of December 31, 2001, and the related consolidated statements of income, of
changes in stockholders' equity and comprehensive income, and of cash flows
for the year then ended (not presented herein); and in our report dated
February 11, 2002, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31,
2001, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
July 22, 2002
20
3M Company and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of
1995. These statements may be identified by the use of words like
"plan," "expect," "aim," "believe," "project," "anticipate," "intend,"
"estimate," "will," "should," "could" and other expressions that indicate
future events and trends. All statements that address expectations or
projections about the future, including statements about the company's
strategy for growth, product development, market position, expenditures
and financial results, are forward-looking statements.
Forward-looking statements are based on certain assumptions and
expectations of future events that are subject to risks and
uncertainties. Actual future results and trends may differ materially
from historical results or those projected in any such forward-looking
statements depending on a variety of factors, including but not limited
to the following:
* The effects of, and changes in, worldwide economic conditions. The
company operates in more than 60 countries and derives more than half of
its revenues from outside the United States. The company's business may
be affected by factors in the United States and other countries that are
beyond its control, such as downturns in economic activity in a specific
country, region, business or industry; social, political or labor
conditions in a specific country or region; or potential adverse foreign
tax consequences.
* Foreign currency exchange rates and fluctuations in those rates may
affect the company's ability to realize projected growth rates in its
sales and net earnings and its results of operations. Because the company
derives more than half its revenues from outside the United States, its
ability to realize projected growth rates in sales and net earnings and
results of operations could be adversely affected if the United States
dollar strengthens significantly against foreign currencies.
* The company's growth objectives are largely dependent on the timing and
market acceptance of its new product offerings, including its ability to
renew its pipeline of new products and to bring those products to market.
This ability may be adversely affected by difficulties or delays in
product development, such as the inability to: identify viable new
products; successfully complete clinical trials and obtain regulatory
approvals; obtain adequate intellectual property protection; or gain
market acceptance of new products.
* The company's future results are subject to fluctuations in the costs
of purchased components and materials due to market demand, currency
exchange risks, shortages and other factors. The company depends on
various components and materials for the manufacturing of its products.
Although the company has not experienced any difficulty in obtaining
21
components and materials, it is possible that any of its supplier
relationships could be terminated in the future. Any sustained
interruption in the company's receipt of adequate supplies could have a
material adverse effect on the company. In addition, while the company
has a process to minimize volatility in component and material pricing,
no assurance can be given that the company will be able to successfully
manage price fluctuations due to market demand, currency risks, or
shortages, or that future price fluctuations will not have a material
adverse effect on the company.
* The possibility that acquisitions, divestitures and strategic alliances
may not meet sales and/or profit expectations. As part of the company's
strategy for growth, the company has made and may continue to pursue
acquisitions, divestitures and strategic alliances. However, there can be
no assurance that these will be completed or beneficial to the company.
* The company is the subject of various legal proceedings. The current
estimates of the potential impact on the company's consolidated financial
position, results of operations and cash flows for its legal proceedings
and claims are predictions made by the company about the future and
should be considered forward-looking statements. These estimates could
change in the future. For a more detailed discussion of the legal
proceedings involving the company, see the discussion of "Legal
Proceedings" in Part II, Item 1 of this Quarterly Report on Form 10-Q.
CERTIFICATIONS
The Securities and Exchange Commission (SEC) has issued an order requiring
that the largest public companies file with the SEC a statement to certify
completeness and accuracy of the covered reports along with other
representations (includes 2001 Form 10-K, 2002 First and Second Quarter
Form 10-Q's, the proxy statement for the 2002 Stockholders Meeting, and any
Form 8-K's). 3M's Chief Executive Officer (CEO) and Chief Financial
Officer (CFO) will be filing separate copies of this certification with the
SEC on or before the due date of August 14, 2002. In addition, with respect
to this Report, the CEO and CFO have both made a certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
(attached as Exhibit 99.1 and Exhibit 99.2 to this filing).
RESULTS OF OPERATIONS
The pro forma amounts (which excluding non-recurring items) that are
discussed are not in accordance with, or preferable to, amounts determined
in conformity with generally accepted accounting principles. Reference
should be made to the Consolidated Financial Statements and accompanying
Notes for additional information concerning non-recurring items, and for
additional information on amounts determined in accordance with generally
accepted accounting principles. The determination of non-recurring items
may not be comparable to similarly titled measures used by other entities.
The company believes that discussion of results excluding non-recurring
items provides a useful analysis of operating trends.
22
Second Quarter
- --------------
Overview:
3M delivered a solid earning performance in the second quarter of 2002.
The company reported net income of $466 million, or $1.18 per diluted
share, in the second quarter of 2002, versus $202 million, or $0.50 per
diluted share, in the second quarter of last year. Earnings were impacted
by non-recurring pre-tax charges of $148 million and $397 million in the
second quarter of 2002 and 2001, respectively, related to the company's
current restructuring program. Excluding these non-recurring items,
earnings per diluted share were $1.36 in the second quarter of 2002,
compared with $1.12 in the second quarter last year, an increase of 21.4
percent. Currency impacts reduced earnings by 3 cents per diluted share in
the second quarter of 2002, while the adoption of a new accounting standard
resulting in the cessation of goodwill and other indefinite-lived
intangible asset amortization boosted earnings by 4 cents per diluted
share.
Goodwill and other intangible assets:
Statement on Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets," was adopted effective January 1, 2002. Goodwill
and indefinite-lived intangible assets are no longer amortized. Goodwill
and indefinite-lived intangible assets are subject to an impairment test at
least annually. The company completed its assessment of any potential
impairment upon adoption of this standard and determined that no impairment
existed at January 1, 2002. Additional information regarding accounting
pronouncements of the FASB, including SFAS No. 142, is included in the
Notes to the Consolidated Financial Statements.
Sales:
Components of Sales Change
Second Quarter 2002
U.S. Intl. W.W.
Volume (1.8)% 2.9% 0.6%
Price -- 1.3 0.7
Translation -- 1.5 0.8
----- ----- -----
Total (1.8)% 5.7% 2.1%
===== ===== =====
Worldwide sales for the second quarter of 2002 totaled $4.161 billion, up
2.1 percent from the second quarter of last year. Volume increased six-
tenths of one percent from the second quarter last year. Selling prices
were up seven-tenths of one percent. The weaker U.S dollar increased
worldwide sales by eight-tenths of one percent. There was minimal impact in
the quarter from acquisitions or divestitures.
In the United States, sales for the second quarter of 2002 totaled $1.890
billion, with volume down 1.8 percent. International sales for the second
quarter of 2002 totaled $2.271 billion (an increase of 5.7 percent in U.S.
dollars), with volume up 2.9 percent. Volume growth was led by 15.2
percent growth in the Asia Pacific area, with volume up 9.5 percent in
Japan. Volume increased 24.6 percent in Asia (excluding Japan, Australia
and New Zealand). Volume declined 4.3 percent in Europe. Latin American
23
volumes declined 4.5 percent, driven by ongoing difficult economic
conditions. Volume in Canada increased 1.6 percent. Currency effects
boosted international sales by 1.5 percent, driven by a 6.5 percent
positive impact in Europe and a 1.4 percent positive impact in the Asia
Pacific area. Currency was negative by about 14 percent in Latin America.
International selling prices increased 1.3 percent, primarily due to
currency-related price increases in Latin America.
Non-recurring items:
The second quarter of 2002 includes charges of $148 million under the
company's previously announced restructuring plan, principally related to
employee severance and benefit costs, accelerated depreciation charges and
other associated exit costs. These charges have been classified as a
component of cost of sales ($91 million); selling, general and
administrative expenses ($56 million); and research, development and
related expenses ($1 million). Of the total second quarter charge, $87
million related to employee severance and benefits, $21 million related to
accelerated depreciation (incremental charges resulting from shortened
depreciable lives of affected assets, primarily related to downsizing or
consolidating manufacturing operations), and $40 million related to other
exit activities. Other exit activities include incremental costs and
contractual obligations for items such as lease termination payments and
other facility exit costs (such as demolition of buildings, inventory
disposals, other) incurred as a direct result of this plan. Non-recurring
income of $18 million recorded in minority interest related to
restructuring activity at Sumitomo 3M Limited. Additional information
concerning non-recurring items is provided in the Notes to Consolidated
Financial Statements and elsewhere herein.
The second quarter of 2001 includes restructuring charges of $397 million,
principally related to employee severance and benefit costs under the
company's previously announced restructuring plan. These charges have been
classified as a component of cost of sales ($141 million); selling, general
and administrative expenses ($242 million); and research, development and
related expenses ($14 million). Of the total second quarter 2001 charge,
$386 million related to employee severance and benefit costs, and $11
million related to other exit activities.
24
Supplemental Unaudited Consolidated Statement of Income Information
(Dollars in millions, except per-share amounts)
Three months ended Three months ended
June 30, 2002 June 30, 2001
---------------------------- ----------------------------
Excluding Excluding
non- Non- non- Non-
recurring recurring Reported recurring recurring Reported
items items total items items total
--------- ------- -------- --------- -------- -------
Net sales $4,161 $ -- $4,161 $4,073 $ -- $4,073
Operating expenses
Cost of sales 2,140 91 2,231 2,125 141 2,266
Selling, general and
administrative
expenses 919 56 975 948 242 1,190
Research, develop-
ment and related
expenses 268 1 269 269 14 283
Total 3,327 148 3,475 3,342 397 3,739
Operating
income (loss) 834 (148) 686 731 (397) 334
Interest expense
and (income), net 11 -- 11 24 -- 24
Income (loss) before
income taxes and
minority interest 823 (148) 675 707 (397) 310
Provision (benefit)
for income taxes 267 (57) 210 237 (143) 94
Effective tax rate 32.5% 31.2% 33.5% 30.4%
Minority interest
expense (income) 17 (18) (1) 19 (5) 14
Net income (loss) $ 539 $ (73) $ 466 $ 451 (249) $ 202
Per diluted share $ 1.36 $(.18) $1.18 $1.12 $(.62) $ .50
The following discussion excludes the impact of non-recurring items in all
periods.
Costs:
Cost of sales for the second quarter of 2002 was 51.5 percent of sales,
down seven-tenths of one percentage point from the second quarter of last
year. Gross margins were positively impacted by Six Sigma efforts to drive
costs out of our factories by optimizing manufacturing and other business
processes. Indirect cost reduction efforts and lower employment levels
also boosted our factory performance. Positive sales mix impacts and
25
lower raw material costs also positively impacted the gross margin. Cost
of sales includes manufacturing, engineering and freight costs.
Selling, general and administrative (SG&A) expenses for the second quarter
of 2002 were 22.1 percent of sales, down 1.2 percentage points from the
second quarter of last year. SG&A expenses were $29 million lower than in
the second quarter of last year, a reduction of 3 percent. Lower employment
levels, along with continued efforts to reduce overall indirect costs,
helped curtail spending. SG&A also benefited by $17 million due to the
cessation of goodwill and other indefinite-lived asset amortization
effective January 1, 2002.
Operating income:
Operating income for the second quarter of 2002 was 20.0 percent of sales,
compared with 17.9 percent in the second quarter of last year. Although the
company faced continued economic weakness, operating income grew by $103
million, or 14.1 percent, for the second quarter of 2002, as compared to
the second quarter of last year. The cessation of goodwill and other
indefinite-lived asset amortization benefited operating income by $17
million, while currency impacts reduced operating income by an estimated
$24 million. Operating income margins in the second quarter of 2002 were
17.0 percent in the United States and 22.5 percent internationally.
Interest expense and income:
Interest expense for the second quarter of 2002 was $20 million, which was
$13 million lower than in the second quarter of last year. This reduction
was driven by lower overall borrowings and declining rates on floating rate
debt. Interest income remained consistent with the second quarter of last
year.
Provision for income taxes:
The worldwide effective income tax rate for the second quarter of 2002 was
32.5 percent, down from 33.5 percent in the second quarter of last year and
32.9 percent for total year 2001. The tax rate decrease compared to total
year 2001 is principally due to the cessation of goodwill and other
indefinite-lived asset amortization.
Net income:
Net income for the second quarter of 2002 totaled $539 million, or $1.36
per diluted share, compared with $451 million, or $1.12 per diluted
share, in the second quarter of last year. The cessation of goodwill and
other indefinite-lived asset amortization effective January 1, 2002,
increased earnings per diluted share by 4 cents. While the effect of
translating profits from local currencies into U.S. dollars provided a
slight benefit to second quarter results, purchasing and transaction
effects reduced net income. The combined currency effects reduced net
income for the second quarter by an estimated $13 million, or 3 cents per
diluted share, which included a $10 million pre-tax loss ($6 million
after tax loss) related to the discontinuance of a hedge. This estimate
includes the effect of translating profits from local currencies into U.S.
dollars; the impact of currency fluctuations on the transfer of goods
between 3M operations in the United States and abroad; and transaction
gains and losses, including derivative instruments designed to reduce
exchange rate risk, which for
26
the second quarter of 2002 primarily included the $6 million after-tax loss
related to the discontinuance of a hedge.
First Six Months
- ----------------
Overview:
The company reported net income of $918 million, or $2.32 per diluted
share, in the first six months of 2002, versus $655 million, or $1.63 per
diluted share, in the first six months of last year. In 2002, earnings
were impacted by non-recurring pre-tax charges of $202 million related to
the company's current restructuring program. In 2001, earnings were
impacted by $397 million relating to the company's current restructuring
program and by non-recurring acquisition-related pre-tax costs of $23
million. Excluding these non-recurring items, earnings per diluted share
were $2.59 in the first six months of 2002, compared with $2.28 in the
first six months of last year, an increase of 13.6 percent. Currency
impacts reduced earnings by 6 cents per diluted share, while the adoption
of a new accounting standard resulting in the cessation of goodwill and
other indefinite-lived intangible asset amortization boosted earnings by 6
cents per diluted share for the first six months of 2002.
Sales:
Components of Sales Change
Six Months 2002
U.S. Intl. W.W.
Volume - core (4.0)% (0.6)% (2.1)%
Volume - acquisitions and divestitures 0.2 0.4 0.2
Price 0.4 1.0 0.7
Translation -- (2.0) (1.1)
----- ----- -----
Total (3.4)% (1.2)% (2.3)%
===== ===== =====
Worldwide sales for the first six months of 2002 totaled $8.051 billion,
down 2.3 percent from the first six months of last year. Core volume
(which excludes acquisition and divestiture impacts) decreased 2.1 percent
from the same period last year. Selling prices were up seven-tenths of one
percent. The stronger U.S. dollar (on a six-month basis) decreased
worldwide sales by 1.1 percent.
In the United States, sales for the first six months of 2002 totaled $3.673
billion, with core volume down 4.0 percent. International sales for the
first six months of 2002 totaled $4.378 billion (down 1.2 percent in U.S.
dollars), with core volume down six-tenths of one percent. In Europe, core
volume decreased 6.1 percent, with reported volume down 5.4 percent.
In the Asia Pacific area, volume increased 8.4 percent. Volume increased
2.9 percent in Japan. Volume increased 17.0 percent in Asia (excluding
Japan, Australia, New Zealand). In Latin America, volume decreased 7.0
percent. Volume in Canada decreased 0.6 percent. Currency reduced
international sales by 2.0 percent, driven by negative translation of 2.9
percent in the Asia Pacific area and 10.5 percent in Latin America. These
negative effects were partially offset by positive translation of 1.5
percent in Europe.
27
Non-recurring items:
The first six months of 2002 includes non-recurring charges of $202 million
under the company's previously announced restructuring plan, principally
related to employee severance and benefit costs, accelerated depreciation
charges, and other associated exit costs. These charges have been
classified as a component of cost of sales ($121 million); selling, general
and administrative expenses ($77 million); and research, development and
related expenses ($4 million). Of the total charges for the first six
months, $111 million related to employee severance and benefit costs, $47
million related to accelerated depreciation (incremental charges resulting
from shortened depreciable lives of affected assets, primarily related to
downsizing or consolidating manufacturing operations), and $44 million
related to other exit activities. Other exit activities included
incremental costs and contractual obligations for items such as lease
termination payments and other facility exit costs (such as demolition of
buildings, inventory disposals, other) incurred as a direct result of this
plan. Additional information concerning non-recurring items is provided
in the Notes to Consolidated Financial Statements and elsewhere herein.
The first six months of 2001 includes non-recurring costs of $420 million.
These charges have been classified as a component of cost of sales ($164
million); selling, general and administrative expenses ($242 million); and
research, development and related expenses ($14 million). These charges
primarily related to the company's current restructuring program ($397
million) and also included acquisition-related costs that were recorded in
cost of sales ($23 million). The $23 million primarily related to inventory
acquired in business combinations that must be recorded at fair market
value instead of manufacturing cost and the subsequent sale of these
acquired inventories.
28
Supplemental Unaudited Consolidated Statement of Income Information
(Dollars in millions, except per-share amounts)
Six months ended Six months ended
June 30, 2002 June 30, 2001
---------------------------- ----------------------------
Excluding Excluding
non- Non- non- Non-
recurring recurring Reported recurring recurring Reported
items items total items items total
--------- ------- -------- --------- -------- -------
Net sales $8,051 $ -- $8,051 $8,237 $ -- $8,237
Operating expenses
Cost of sales 4,146 121 4,267 4,298 164 4,462
Selling, general and
administrative
expenses 1,775 77 1,852 1,901 242 2,143
Research, develop-
ment and related
expenses 529 4 533 547 14 561
Total 6,450 202 6,652 6,746 420 7,166
Operating
income (loss) 1,601 (202) 1,399 1,491 (420) 1,071
Interest expense
and (income), net 21 -- 21 50 -- 50
Income (loss) before
income taxes and
minority interest 1,580 (202) 1,378 1,441 (420) 1,021
Provision (benefit)
for income taxes 513 (76) 437 482 (150) 332
Effective tax rate 32.5% 31.7% 33.5% 32.5%
Minority interest 41 (18) 23 41 (7) 34
Net income (loss) $1,026 $(108) $ 918 $ 918 (263) $ 655
Per share-diluted $ 2.59 $(.27) $2.32 $2.28 $(.65) $ 1.63
The following discussion excludes the impact of non-recurring items in all
periods.
Costs:
Cost of sales for the first six months of 2002 was 51.5 percent of sales,
down seven-tenths of one percentage point from the first six months of last
year. Gross margins were positively impacted by accelerated implementation
of Six Sigma, indirect cost control, and employment reductions under the
current restructuring plan. Positive sales mix impacts and lower raw
material costs also positively impacted the gross margin. Cost of sales
includes manufacturing, engineering and freight costs.
29
Selling, general and administrative (SG&A) expenses for the first six
months of 2002 were 22.0 percent of sales, down 1.1 percentage points from
the first six months of last year. SG&A expenses were $126 million lower
than in the first six months of last year, a reduction of 6.6 percent. This
improvement in SG&A costs was the result of Six Sigma implementation,
indirect cost control and employment reductions under the current
restructuring plan. SG&A also benefited by $31 million due to the
cessation of goodwill and other indefinite-lived asset amortization
effective January 1, 2002.
Operating income:
Operating income for the first six months of 2002 was 19.9 percent of
sales, compared with 18.1 percent in the first six months of last year.
Although the company faced continued economic weakness, operating income
grew by $110 million, or 7.3 percent, for the first six months of 2002, as
compared to the first six months of last year. The cessation of goodwill
and other indefinite-lived asset amortization benefited operating income by
$31 million, while currency impacts reduced operating income by an
estimated $52 million. Operating income margins in the first six months of
2002 were 15.2 percent in the United States and 23.8 percent
internationally.
Interest expense and income:
Interest expense for the first six months of 2002 was $39 million, which
was $32 million lower than in the first six months of last year. Declining
rates on floating-rate debt drove the reduction in expense, along with some
benefit related to lower overall average debt balances. Interest income
was $18 million, compared with $21 million in the first six months of last
year, driven by lower interest rates.
Provision for income taxes:
The worldwide effective income tax rate for the first six months of 2002
was 32.5 percent, down from 33.5 percent in the first six months of last
year and 32.9 percent for total year 2001. The tax rate decrease compared
to total year 2001 is principally due to the cessation of goodwill and
other indefinite-lived asset amortization.
Net income:
Net income for the first six months of 2002 totaled $1.026 billion, or
$2.59 per diluted share, compared with $918 million, or $2.28 per diluted
share, in the first six months of 2001. The cessation of goodwill and
other indefinite-lived asset amortization effective January 1, 2002,
increased earnings per diluted share by 6 cents. The company estimates
that currency effects reduced net income for the first six months of 2002
by about $26 million, or 6 cents per diluted share, compared with the first
six months of 2001. This estimate includes the effect of translating
profits from local currencies into U.S. dollars; the impact of currency
fluctuations on the transfer of goods between 3M operations in the United
States and abroad; and transaction gains and losses, including derivative
instruments designed to reduce exchange rate risks, which for the first six
months of 2002 had a minimal impact on net income.
30
PERFORMANCE BY BUSINESS SEGMENT
Following is a discussion of the global operating results of the company's
six business segments in the second quarter and first six months of 2002.
With the exception of Health Care and Transportation, Graphics and Safety,
most of 3M's business segments were impacted by global economic weakness.
All markets benefited from savings associated with the restructuring plan.
In the Industrial Markets segment, volume decreased 0.5 percent in the
second quarter after decreasing 7.0 percent in the first quarter of 2002,
compared to the same periods of 2001. These decreases reflected ongoing
weakness in most sectors of the global manufacturing and industrial
economy. The automotive aftermarket, industrial tape and engineered
adhesives businesses posted good volume growth in the second quarter, but
overall growth was held back by declines in other product categories.
Operating profit increased 14 percent in the second quarter, driven by
ongoing process efficiencies and savings associated with the restructuring
plan. Operating income for the first six months of 2002 decreased about 5
percent, reflecting the impact of lower volumes.
In the Transportation, Graphics and Safety Markets segment, volume grew 9.3
percent in the second quarter and 5.3 percent in the first quarter of 2002,
compared to the same periods in 2001. Growth was broad-based in the
quarter and for the first six months, led by optical films, safety and
security products and solutions, automotive OEM products and respiratory
protection products. Operating leverage was substantial in the second
quarter and for the first six months, as profits improved around 20 percent
in both periods, boosted by strong volume growth and favorable product mix.
In the Health Care Markets segment, including acquisitions, volume grew 6.4
percent in the second quarter after growth of 6.9 percent in the first
quarter of 2002. This growth includes approximately 2 percent due to
acquisitions in the first quarter, with minimal impact from acquisitions in
the second quarter. The second quarter and first six months growth was
lead by pharmaceutical and medical products businesses, as well as dental
and orthodontic businesses. Operating income improved 14 percent in the
second quarter, and more than 20 percent for the first six months.
In September 2001, 3M signed an agreement with Eli Lilly and Company to
collaborate on resiquimod, a potential breakthrough treatment for genital
herpes. Resiquimod is currently in Phase 3 clinical trials, and moving
toward an anticipated 2004 submission date to the FDA. 3M received $100
million in the fourth quarter of 2001 from Eli Lilly in consideration for
research and development efforts. The majority of the $100 million is
expected to be recognized as revenue in 2002 through 2004, as the majority
of the future research and development is expected to be performed during
this period. For the first six months of 2002, revenue of about $20
million has been recorded related to this agreement.
In the Consumer and Office Markets segment, volume decreased 2.4 percent in
the second quarter and 8.1 percent in the first quarter of 2002. These
decreases were due mainly to ongoing weakness in the office supply channel.
Companies have curtailed spending in many areas, including office
supplies. 3M sales to the home improvement channel increased
31
significantly in the second quarter. Operating income increased 16 percent
in the second quarter, benefiting from Six Sigma, global sourcing and
savings associated with the restructuring plan. Operating income increased
9.5 percent for the first six months of 2002.
In the Electro and Communications Markets segment, volume declined about 15
percent in the second quarter and declined about 23 percent in the first
quarter of 2002. Volumes remained weak in the telecom industry and in most
sectors of the electronics manufacturing industry. On the positive side,
unit sales of 3M brand Microflex Circuits increased at a double-digit rate
in the second quarter. Operating income increased about 8 percent for the
second quarter, but was down for the first six months of 2002.
In the Specialty Material Markets segment, volume declined 5.9 percent in
the second quarter and 16.8 percent in the first quarter of 2002. These
decreases were primarily due to the product related phase out discussed in
previous Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q
filings. The company plans to introduce several new Scotchgard-branded
products over the next several months to rebuild this business. Operating
profits in the market improved about 10 percent in the second quarter,
despite the volume reduction, but profits were down about 15 percent for
the first six months.
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity remain strong. Working
capital (defined as current assets minus current liabilities) totaled
$2.437 billion at June 30, 2002, increasing $650 million from year-end
2001. This increase was largely driven by a shift in debt from short-term
to long-term compared with year-end 2001.
The accounts receivable turnover index (defined as quarterly net sales
divided by ending accounts receivable, multiplied by 4) totaled 5.95 at
June 30, 2002, compared with 6.22 at year-end 2001 and 5.52 at June 30,
2001. Receivables increased $313 million compared to year-end, but
decreased $156 million, or 5 percent, versus the comparable period last
year. The inventory turnover index (defined as quarterly factory cost
excluding non-recurring divided by ending inventory, multiplied by 4) was
4.09 at June 30, 2002, up from 3.76 at year-end 2001, and 3.51 at June 30,
2001. Inventories declined $93 million versus year-end, and declined by
$301 million compared with June 30, 2001. Currency effects impacted these
consolidated balance sheet comparisons. Currency effects at June 30, 2002,
compared with December 31, 2001, increased the accounts receivables and
inventory balances (due to the weaker U.S. dollar) by $109 million and $67
million, respectively.
Total debt decreased $249 million from year-end 2001. As of June 30, 2002,
total debt was 29 percent of total capital, compared with 32 percent at
year-end 2001. The company's believes its strong credit rating provides
ready and ample access to funds in the global capital markets. The
company's available short-term lines of credit have not materially changed
since December 31, 2001. An additional letter of credit of $266 million at
year-end 2001 related to the ESPE Dental AG business combination has
increased to $298 million (due to exchange rate changes). The company also
32
estimates that its uncommitted lines of credit total approximately $250
million.
Net cash provided by operating activities totaled $1.596 billion in the
first six months of the year, up $156 million from the same period last
year. Restructuring-related cash payments totaled $239 million in the
first six months of 2002, with approximately $100 million in additional
cash outflows expected for the remainder of 2002. Cash flow from operating
activities can fluctuate significantly from quarter to quarter. For
example, cash flow in the second quarter of 2002 benefited from differences
in the timing of certain tax payments when compared to the first quarter of
2002. Pension funding decisions, additional tax timing differences and
other impacts could significantly impact cash flows in the second half of
2002.
Most of the company's implant liabilities have been paid; accordingly,
receipt of related insurance recoveries will increase future cash flows.
For a more detailed discussion, refer to Part II, Item 1, Legal
Proceedings, of this Quarterly Report on Form 10-Q. 3M's insurance
recoveries, net of claims paid, related to the mammary implant matter
resulted in $27 million of net cash inflows in the first six months of
2002, compared with $10 million of net cash inflows in the same period of
2001.
Cash used in investing activities totaled $328 million in the first six
months of the year, compared with $712 million in the same period last
year. Capital expenditures for the first six months of 2002 were $363
million, a decrease of $184 million from the same period last year. Cash
used for acquisitions of businesses totaled $208 million in the first six
months of 2001. This cash outflow principally related to the acquisition
of MicroTouch Systems Inc., a touch screen manufacturer, for $158 million
in cash, net of cash acquired. While no acquisitions were completed in the
first half of 2002, the company is actively considering acquisitions and
expects to close on several in the second half of 2002.
Financing activities in the first six months of 2002 for both short-term
and long-term debt included net cash outflows of $285 million, compared
with net cash inflows of $523 million in the same period last year. The
decrease in net short-term debt of $394 million includes the portion of
short-term debt with original maturities of 3 months or less. Repayment of
other debt of $417 million includes $410 million of commercial paper having
original maturities greater than 3 months. Proceeds from other debt of
$526 million includes $126 million of commercial paper having original
maturities greater than 3 months.
Treasury stock repurchases for the first six months of 2002 were $705
million, compared with $852 million in the same period last year. The
company repurchased about 6.0 million shares of common stock in the first
six months of 2002, compared with about 7.5 million shares in the same
period last year. In November 2001, the Board of Directors authorized the
repurchase of up to $2.5 billion of the company's stock between January 1,
2002, and December 31, 2003. As of June 30, 2002, about $1.8 billion
remains available for repurchases. Stock repurchases are made to support
33
the company's Management Stock Ownership Program, its General Employees'
Stock Purchase Plan and for other corporate purposes.
A reduction in weighted average diluted shares outstanding (including the
effects of repurchases, issuances and dilution) resulted in a benefit of 2
cents per diluted share in the second quarter of 2002, and 2 cents per
diluted in the first quarter of 2002, compared to the same periods of 2001.
Cash dividends paid to shareholders totaled $483 million in the first six
months of this year, compared with $477 million in the same period last
year. In February 2002, the quarterly dividend was increased to 62 cents
per share from 60 cents per share.
2002 MANAGEMENT STOCK OWNERSHIP PROGRAM
The 3M 2002 Management Stock Ownership Program was approved by shareholders
on May 14, 2002. The plan has 22.7 million shares of common stock
available to be issued or delivered as a result of options, restricted
stock or other stock awards granted during the term of the 2002 Program, or
made subject to stock appreciation rights granted during the term of the
2002 Program. The term of the 2002 Program expires on May 14, 2005. The
annual stock options granted on May 14, 2002, totaled approximately 6.2
million. The company currently estimates that the impact on pro forma
diluted earnings per share in 2002 will be similar to 2001.
THE EURO CONVERSION
There have not been any significant new developments relating to the euro
conversion since year-end 2001. Refer to the 2001 Annual Report on Form
10-K for a complete discussion of the euro conversion.
FUTURE OUTLOOK
While the company is hopeful that the global economy will improve, its
spending plans reflect a continuing challenging economic backdrop for the
remainder of 2002. The company will continue to press ahead with its five
corporate initiatives aimed at accelerating long-term top-line growth,
improving cash efficiency and lowering its total cost structure. Once the
global economy begins to improve, the company expects to be well
positioned to leverage its strong, diverse and global business portfolio
into solid and sustainable earnings growth.
The company expects 2002 earnings reported earnings to be within a range
of $4.88 to $5.03 per diluted share. Excluding non-recurring items, the
company expects earnings to be within a range of $5.15 to $5.30 per
diluted share. This range assumes a positive 12-cent impact due to
cessation of goodwill and other indefinite-lived intangible asset
amortization in accordance with the adoption of a recent accounting
standard. Earnings, on both a reported and pro forma basis, for the
third quarter of 2002 are expected to be within a range of $1.35 to $1.40
per diluted share.
In the second quarter of 2001, the company announced a restructuring plan,
which is discussed in the company's 2001 Annual Report on Form 10-K. Under
the restructuring plan, the company eliminated about 2,200 positions
34
during the first six months of 2002, and since inception has eliminated about
5,700 positions. These positions represent a wide range of functions
throughout the company. Once all final actions have been completed, the
company expects to have eliminated approximately 6,700 positions. The
remaining 1,000 positions represent employees who will leave the company in
the second half of 2002 under the restructuring plan. These employees were
included in the plan management approved and severance benefits have been
communicated to them. The company expects no additional charges will be
incurred going forward related to this corporate restructuring plan. Cash
payments for the second half of 2002 are expected to total approximately
$100 million.
Selected information related to the charges follows.
Employee
Severance
and Accelerated
(Millions) Benefits Depreciation Other Total
-------- ------------ ------- -------
Charges
Year 2001 $472 $80 $17 $569
First quarter 2002 24 26 4 54
Second quarter 2002 87 21 40 148
----- ----- ----- -----
Total charges $583 $127 $61 $771
===== ===== ===== =====
Restructuring liability
Current liability at
December 31, 2001 $185 $13 $198
First six months 2002 activity
Charges 111 47 44 202
Reclassification from
long-term portion
of liability 47 - 47
Non-cash and long-term
portion of liability (35) (47) - (82)
Cash payments (228) (11) (239)
----- ----- -----
Current liability as of
June 30, 2002 $ 80 46 $126
===== ===== =====
Related to this restructuring plan, the company estimates it saved $80
million in the second half of 2001, and $160 million on an incremental
basis in the first half of 2002. The company expects the incremental
impact for the year 2002 to be over $300 million. Upon completion of all
actions, it is estimated that the restructuring plan will have generated
approximately $500 million in annualized savings. The vast majority of the
savings will be reduced employee costs. The 2001 savings were most
prominent in SG&A, with cost of sales benefits occurring in late 2001 and
into 2002. Numerous factors may create offsets to these savings, such as
35
the potential for continued weakness in sales volumes, normal increases
in compensation and benefits, and other inflationary factors.
The company is increasingly striving to move costs outside the United
States to naturally protect 3M from currency fluctuations. The company
increased the amount and duration of its foreign currency hedges
throughout 2001 to help dampen year-over-year effects and to improve the
predictability of future earnings. The company policy is to hedge an
estimated 50 percent of its annual income statement foreign currency risk.
The company may deviate from this 50 percent target based on uncertainty
of future exposures or market conditions. However, this hedging program
will not make 3M immune to currency impacts.
Raw material costs were down an estimated 4 percent in the first six
months of 2002, and 3M also expects some improvement for the remainder of
2002, due both to 3M's continued global sourcing initiative and cost-
reduction efforts. The company expects a tax rate in the 32.5 percent
range for the remainder of 2002. Capital expenditures are expected to
total approximately $900 million for total year 2002.
3M's longer-term prospects remain bright. The company continues to focus
on several initiatives (Six Sigma, Global Sourcing Effectiveness, 3M
Acceleration, Indirect Cost Reduction and eProductivity) that will
strengthen 3M and enhance its competitiveness. In addition, through the
current restructuring plan, 3M is making structural adjustments that will
help ensure consistent future earnings performance.
36
3M Company and Subsidiaries
PART II. Other Information
Item 1. Legal Proceedings
General
- ---------
The company and some of its subsidiaries are named as defendants in a
number of actions, governmental proceedings and claims, including
environmental proceedings and products liability claims involving
products now or formerly manufactured and sold by the company. In some
actions, the claimants seek damages as well as other relief, which, if
granted, would require substantial expenditures. The company has
recorded 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.
While the company believes that the ultimate outcome of all of the
proceedings and claims described in "Legal Proceedings", individually
and in the aggregate, will not have a material adverse effect on its
consolidated financial position, results of operations, or cash flows,
there can be no certainty that the company may not ultimately incur
charges, whether for breast implant litigation, respirator/mask/asbestos
litigation, environmental matters, or other actions, in excess of
presently recorded liabilities.
The company cannot always definitively determine possible liabilities
that exceed recorded amounts related to the legal proceedings described
in the preceding paragraph. However, the company believes it unlikely,
based upon the nature of the legal proceedings and its current knowledge
of relevant facts and circumstances, that the possible liabilities
exceeding recorded amounts would be material to its consolidated
financial position, results of operations or cash flows. With respect to
products liability claims, such a conclusion about possible liabilities
considers insurance coverage available for such liabilities.
While the company believes that a material adverse impact on its
consolidated financial position, results of operations, or cash flows
from any such future charges is unlikely, given the inherent uncertainty
of litigation, a remote possibility exists that a future adverse ruling
or unfavorable development could result in future charges that could
have a material adverse impact on the company. The current estimates of
the potential impact on the company's consolidated financial position,
results of operations and cash flows for the proceedings and claims
described in "Legal Proceedings" could change in the future.
37
Breast Implant Litigation
- -------------------------
The company and certain other companies have been named as defendants in
a number of claims and lawsuits alleging damages for personal injuries
of various types resulting from breast implants formerly manufactured by
the company or a related company. The company entered the business of
manufacturing breast implants in 1977 by purchasing McGhan Medical
Corporation. In 1984, the company sold the business to a corporation
that also was named McGhan Medical Corporation.
As of June 30, 2002, the company is named as a defendant, often with
multiple co-defendants, in 95 lawsuits in various courts and 5 claims,
all seeking damages for personal injuries from allegedly defective
breast implants. These lawsuits and claims purport to represent 607
individual claimants.
3M has confirmed that approximately 11 of the 607 claimants have opted
out of the revised class action settlement program approved by the
United States District Court for the Northern District of Alabama (the
"Revised Settlement Program") and have 3M implants. Most of the
claimants in these confirmed cases have alleged an unspecified amount of
damages above the jurisdictional limit of the courts in which the cases
were filed. The company does not consider its remaining probable
liability for these confirmed cases to be material.
The company believes that most of the remaining 596 claimants will be
dismissed either because the claimants did not have 3M implants or the
claimants accepted benefits under the Revised Settlement Program. Most
of these claimants have filed lawsuits that either do not allege a
specific amount of damages or allege an unspecified amount of damages
above the jurisdictional limit of the court. The company continues to
work to clarify the status of these lawsuits and claims.
The company's insurers initiated a declaratory judgment action in Ramsey
County Minnesota against the company seeking adjudication of certain
coverage and allocation issues. The jury trial phase of this action
finished on February 24, 2000. The jury returned a verdict favorable to
the company by rejecting all of the insurers' remaining defenses to
coverage for breast implant liabilities and costs.
The court's rulings in post verdict motions are considered to be
generally favorable to the company. The court awarded the company
prejudgment interest on amounts owing by insurers including reasonable
attorney fees. However, the court has yet to determine the amount of
attorneys' fees recoverable by the company. The court has indicated a
formula to be used for this calculation that would result in the company
being reimbursed for less than all of its fees. Exact amounts cannot yet
be determined. The court filed the judgment on April 16, 2001 and
entered judgment on May 16, 2001, thus substantially concluding this
matter in the trial court. The company and several insurers appealed the
judgment to the Minnesota Court of Appeals. Oral argument on the appeal
was heard on July 3, 2002. The company expects an opinion will be
issued in the third quarter of 2002. The company also initiated an
arbitration proceeding in London, England to recover insurance coverage
38
for breast implant liability and costs from claims-made insurance
carriers. The arbitration hearing is currently scheduled for January
2003.
As of June 30, 2002, the company had receivables for insurance
recoveries related to the breast implant matter of $371 million,
representing settled but yet to be received amounts ($48 million) as
well as amounts contested by the insurance carriers ($323 million).
During the second quarter of 2002, the company received payments of $15
million from its occurrence carriers. Various factors could affect the
timing and amount of proceeds to be received under the company's various
insurance policies, including (i) the timing of payments made in
settlement of claims; (ii) the outcome of occurrence insurance
litigation in the courts of Minnesota (as discussed above); (iii) the
outcome of the arbitration with claims-made insurers; (iv) delays in
payment by insurers; and (v) the extent to which insurers may become
insolvent in the future. There can be no absolute assurance that the
company will collect all amounts recorded as being probable of recovery
from its insurers.
Respirator/Mask/Asbestos Litigation
- ------------------------------------------
During October 2001, the company defended a case in the Circuit Court of
Holmes County, Mississippi, against plaintiffs claiming that a 3M
respirator and mask did not protect them against contracting claimed
asbestos-related diseases allegedly caused by exposure to products
containing asbestos which were manufactured by other defendants. The
case against the company initially involved six plaintiffs whose claims
were consolidated for trial. The court dismissed one plaintiff's case
just before trial, and a second plaintiff abandoned his case before it
was submitted to the jury. On October 26, the jury returned a verdict
against all defendants in favor of the plaintiffs, four of whom had
claims against the company. The jury awarded the plaintiffs $25 million
each in compensatory damages. The jury denied plaintiffs' request for
punitive damages. Based on the jury's findings of percentage of fault
attributable to each defendant, the company's share of the total verdict
is $22.5 million. The company can provide no assurance at this time
about the ability of any co-defendant to pay its share of any ultimate
judgment or whether a co-defendant's inability to pay will cause a
reallocation of liability for damages among the remaining solvent
defendants under state law. Judgment was entered on January 30, 2002.
Oral argument on the post-trial motions occurred on May 23, 2002. The
trial court has not yet ruled on these motions. Because the company is
vigorously challenging the judgment in post-trial motions, will plan to
appeal if necessary, and believes that the judgment ultimately will be
overturned, no liability has been recorded related to this matter as of
June 30, 2002. If any damages are ultimately assessed against the
company, a substantial portion of such damages would be covered by the
company's product liability insurance.
For more than twenty years, the company has successfully defended and
resolved the claims of approximately 200,000 individual claimants
similar to the ones brought in Holmes County. The company's vigorous
defense of this litigation has resulted in: (i) jury verdicts for the
39
company in the only other two cases tried to verdict (these two
successful verdicts involved allegations about the 3M products which
were virtually indistinguishable from those of the Holmes County case);
(ii) frequent dismissals of lawsuits without any payment by the company;
and (iii) an average settlement value of less than $1,000 for all of the
claims and lawsuits that the company has resolved. In many of these
lawsuits and claims, the company is named as a defendant with multiple
co-defendants where no product the company manufactured is involved or
where the company is ultimately determined not to have manufactured the
products the plaintiffs identified. As noted above, many of these
lawsuits and claims have been dismissed without payment.
As of June 30, 2002, the company is a named defendant, with multiple co-
defendants, in numerous lawsuits and claims in various courts that
purport to represent approximately 74,700 individual claimants. A
majority of these current claimants have not identified specific
products manufactured by the company.
Based on the company's experience, the vast majority of these lawsuits
and claims purportedly relate to the alleged use of company's mask and
respirator products and seek damages from the company and other
defendants for alleged personal injury from occupational exposure to
asbestos or, less frequently, silica found in products manufactured by
other defendants. The remaining lawsuits and claims generally allege
personal injury from occupational exposure to asbestos from unspecified
products claimed to have been manufactured by the company or other
defendants and/or from specialty products containing asbestos
manufactured by the company and/or other defendants many years ago.
Based on the company's experience in defending and resolving these
lawsuits and claims to date and the substantial product liability
insurance provided by the company's insurers, the company believes these
lawsuits and claims will not have a material adverse effect on its
consolidated financial position, results of operations, or cash flows.
As of June 30, 2002, the company had estimated accrued liabilities of
approximately $127 million for these claims. This amount represents the
company's best estimate of the amount to cover the cost and expense of
resolving current and probable future claims. The company also had
receivables for expected insurance recoveries of approximately $196
million. The difference between the accrued liability and insurance
receivable represents the time delay between payment of claims and
receipt of insurance reimbursements.
The company's current estimate of its probable liabilities and
associated expenses for respirator/mask/asbestos litigation is based on
facts and circumstances existing at this time and reasonably anticipated
trends. New developments may occur that could affect the company's
estimate of probable liabilities and associated expenses. These
developments include, but are not limited to, (i) significant changes in
the number of future claims, (ii) significant changes in the average
cost of resolving claims, (iii) changes in the nature of claims
received, (iv) changes in the law and procedure applicable to these
claims, or (v) financial viability of other co-defendants and insurers
40
and other unknown variables. The company cannot determine the impact of
these potential developments on the current estimate of its probable
liabilities and associated expenses.
Environmental Matters
- ---------------------
The company's operations are subject to environmental laws and
regulations enforceable by foreign, federal, state, and local
authorities and private parties in the United States and abroad,
including those pertaining to air emissions, wastewater discharges,
toxic substances, and the handling and disposal of solid and hazardous
wastes. These laws and regulations provide under certain circumstances a
basis for the remediation of contamination, as well as personal injury
and property damage claims. The company has incurred, and will continue
to incur, costs and capital expenditures in complying with these laws
and regulations, defending potential personal injury and property damage
claims, and modifying its business operations in light of its
environmental responsibilities. In its effort to satisfy its
environmental responsibilities and comply with environmental laws and
regulations, the company has established, and periodically updates,
policies relating to environmental standards of performance for its
operations worldwide.
Under certain environmental laws, including the United States
Comprehensive Environmental Response, Compensation and Liability Act of
1980 and similar state laws, the company may be jointly and severally
liable for the costs of environmental contamination at current or former
facilities and at off-site locations. The company has identified
numerous locations, most of which are in the United States, at which it
may have some liability. Amounts expensed for environmental remediation
activities were not material at these locations nor have there been
material changes in the recorded liabilities for environmental matters.
Liabilities for estimated costs of environmental remediation are,
depending on the site, based primarily upon internal or third-party
environmental studies, and estimates as to the number, participation
level and financial viability of any other potentially responsible
parties, the extent of the contamination and the nature of required
remedial actions. Recorded liabilities are adjusted as further
information develops or circumstances change. The company expects that
the amounts recorded will be paid out over the periods of remediation
for the applicable sites, currently ranging up to 30 years.
It is often difficult to estimate the cost of environmental compliance
and remediation and potential claims given the uncertainties regarding
the interpretation and enforcement of applicable environmental laws and
regulations, the extent of environmental contamination and the existence
of alternate cleanup methods. The company's current assessment of the
probable liabilities and associated expenses related to environmental
matters is based on the facts and circumstances known at this time. New
developments may occur that could affect the company's assessment. These
developments include, but are not limited to, (i) changes in the
information available regarding the environmental impact of the
company's operations and products; (ii) changes in environmental
41
regulations or enforcement policies; (iii) new and evolving analytical
and remediation techniques; (iv) success in allocating liability to
other potentially responsible parties; and (v) financial viability of
other potentially responsible parties and third-party indemnitors. The
company cannot determine the impact of these potential developments on
the current estimate of its probable liabilities and associated
expenses.
42
Item 4. Submission of Matters to a Vote of Security Holders
(a) The registrant held its Annual Meeting of Stockholders on May
14, 2002.
(b) Proxies for the meeting were solicited pursuant to Regulation
14; there was no solicitation in opposition to management's
nominees as listed in the Proxy Statement and all such nominees
were elected.
Directors elected to the 2005 Class were Vance D. Coffman, Rozanne L.
Ridgway and Louis W. Sullivan.
Election of Directors:
Vance D. Coffman - For 314,578,333; Withhold 9,947,988
Rozanne L. Ridgway - For 317,202,773; Withhold 7,323,548
Louis W. Sullivan - For 317,279,814; Withhold 7,246,507
Directors whose terms continue after the meeting were Linda G. Alvarado,
Edward A. Brennan, Edward M. Liddy, W. James McNerney, Jr., Aulana L.
Peters and Kevin W. Sharer.
(c) The ratification of the appointment of PricewaterhouseCoopers
LLP, independent accountants, to audit the consolidated financial
statements of the company and its subsidiaries for the year 2002.
For 313,838,201
Against 6,383,558
Abstain 4,304,562
(d) Approval of 2002 Management Stock Ownership Program.
For 232,849,593
Against 45,199,236
Abstain 5,506,400
Broker Non-Vote 40,971,092
(e) Approval of performance goals under Performance Unit Plan.
For 299,066,539
Against 19,938,426
Abstain 5,521,356
(f) Approval of amendment to Executive Profit Sharing Plan
For 295,735,487
Against 21,848,191
Abstain 6,942,643
(g) Stockholder proposal relating to poison pill.
For 159,861,636
Against 114,999,142
Abstain 8,694,451
Broker Non-Vote 40,971,092
43
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as exhibits to this Report.
(12) A statement setting forth the calculation of the
ratio of earnings to fixed charges. Page 45.
(15) A letter from the company's independent accountants
regarding unaudited interim consolidated
financial statements. Page 46.
(99.1) A certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350. Page 47.
(99.2) A certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350. Page 48.
Reports on Form 8-K:
3M filed one Form 8-K for the quarter ended June 30, 2002.
The Form 8-K dated April 9, 2002, indicated that the Board of "Minnesota
Mining and Manufacturing Company" approved changing the company's name to
"3M Company" effective 8 A.M. Eastern Time on April 8, 2002. The "MMM"
ticker symbol remains the same.
None of the other item requirements of Part II of Form 10-Q are applicable
to the company for the quarter ended June 30, 2002.
44
SIGNATURE PAGE
for Form 10-Q for quarter ended June 30, 2002
-----------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
3M COMPANY
------------------------------------------
(Registrant)
Date: August 12, 2002
------------------------------
/s/ Patrick D. Campbell
------------------------------------------
Patrick D. Campbell, Senior Vice President
and Chief Financial Officer
(Mr. Campbell is the Principal Financial
and Accounting Officer and has been duly
authorized to sign on behalf of the
registrant.)