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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
-------------------------- ---------------------
Common Stock, Par Value $.01 Per Share New York Stock Exchange
Pacific Exchange
Chicago Stock Exchange
Note: The common stock of the registrant is also traded on the Swiss
stock exchange.
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes X . No .
The aggregate market value of voting stock held by nonaffiliates of the
registrant, based on the closing price of $124.55 per share as reported on the
New York Stock Exchange-Composite Index was $48.6 billion on January 31, 2003
($48.0 billion at June 30, 2002, based on the closing price of $123.00).
Shares of common stock outstanding at January 31, 2003: 389,978,865.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the company's definitive proxy statement for its annual meeting
to be held on May 13, 2003, are incorporated by reference in this Form 10-K
in response to Part III, Items 10, 11, 12 and 13.
This document (excluding exhibits) contains 79 pages.
The table of contents is set forth on page 2.
The exhibit index begins on page 75.
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3M COMPANY
ANNUAL REPORT ON FORM 10K
TABLE OF CONTENTS
PAGE
PART I
ITEM 1 -- Business --------------------------------------------- 3
ITEM 2 -- Properties ------------------------------------------- 8
ITEM 3 -- Legal Proceedings ------------------------------------ 9
ITEM 4 -- Submission of Matters to a Vote of Security Holders -- 14
PART II
ITEM 5 -- Market Price of Stock and Related Matters ------------ 15
ITEM 6 -- Selected Financial Data ------------------------------ 15
ITEM 7 -- Management's Discussion and Analysis ----------------- 16
ITEM 7A -- Quantitative and Qualitative Disclosures About
Market Risk ------------------------------------------ 37
ITEM 8 -- Financial Statements and Supplementary Data ---------- 38
Index to Financial Statements ------------------------ 38
ITEM 9 -- Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ------------------ 73
PART III
ITEM 10 -- Directors and Executive Officers of the Registrant --- 73
ITEM 11 -- Executive Compensation ------------------------------- 74
ITEM 12 -- Security Ownership of Certain Beneficial Owners
and Management --------------------------------------- 74
ITEM 13 -- Certain Relationships and Related Transactions ------- 74
ITEM 14 -- Controls and Procedures ------------------------------ 74
PART IV
ITEM 15 -- Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ------------------------------------------ 75
Index to Exhibits ------------------------------------ 75
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3M COMPANY
FORM 10-K
For the Year Ended December 31, 2002
PART I
ITEM 1. BUSINESS.
3M Company, formerly known as Minnesota Mining and Manufacturing Company, was
incorporated in 1929 under the laws of the State of Delaware to continue
operations, begun in 1902. The Board of "Minnesota Mining and Manufacturing
Company" approved changing the company's name effective April 8, 2002, to "3M
Company." The MMM ticker symbol remained the same. As used herein, the term
"3M" or "company" includes 3M Company and its subsidiaries unless the context
otherwise indicates.
The company files annual reports, quarterly reports, proxy statements, and
other documents with the Securities and Exchange Commission (SEC) under the
Securities Exchange Act of 1934 (Exchange Act). The public may read and copy
any materials that the company files with the SEC at the SEC's Public Reference
Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers, including the company, that file electronically with the SEC. The
public can obtain any documents that the company files with the SEC at
http://www.sec.gov.
The corporation also makes available free of charge through its Internet
website (http://investor.3M.com) the company's Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if
applicable, amendments to those reports filed or furnished pursuant to the
Exchange Act as soon as reasonably practicable after the company electronically
files such material with, or furnishes it to, the SEC.
GENERAL
3M is a diversified global company with a market presence in health care,
safety, electronics, telecommunications, industrial, consumer and office, and
other markets. 3M is an integrated enterprise characterized by substantial
intercompany cooperation in research, manufacturing and marketing of products.
3M's business has developed from its research and technology in coating and
bonding for coated abrasives, the company's original product. Coating and
bonding is the process of applying one material to another, such as abrasive
granules to paper or cloth (coated abrasives), adhesives to a backing
(pressure-sensitive tapes), ceramic coating to granular mineral (roofing
granules), glass beads to plastic backing (reflective sheeting), and low-tack
adhesives to paper (repositionable notes).
3M is among the leading manufacturers of products for many of the markets it
serves. In all cases, 3M products are subject to direct or indirect
competition. Most 3M products involve expertise in product development,
manufacturing and marketing, and are subject to competition from products
manufactured and sold by other technically oriented companies.
At December 31, 2002, the company employed 68,774 people.
DISTRIBUTION
3M products are sold through numerous distribution channels. Products are sold
directly to users and through numerous wholesalers, retailers, jobbers,
distributors and dealers in a wide variety of trades in many countries around
the world. Management believes that the confidence of wholesalers, retailers,
jobbers, distributors and dealers in 3M and its products, developed through
long association with skilled marketing and sales representatives, has
contributed significantly to 3M's position in the marketplace and to its
growth. 3M has 214 sales offices worldwide, including 18 sales offices in the
United States and 196 sales offices internationally.
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RESEARCH, PATENTS AND RAW MATERIALS
Research and product development constitute an important part of 3M's
activities. Products resulting from research and development have been a major
driver of 3M's growth. Research, development and related expenses totaled
$1.070 billion, $1.084 billion and $1.101 billion in 2002, 2001 and 2000,
respectively. Research and development, covering basic scientific research and
the application of scientific advances to the development of new and improved
products and their uses, totaled $738 million, $745 million and $727 million in
2002, 2001 and 2000, respectively. Related expenses primarily include technical
support provided by the laboratories for existing products.
Corporate research laboratories support research efforts of division and market
laboratories. These corporate laboratories also engage in research not
directly related to existing 3M product lines. Most major operating divisions
have their own laboratories to improve existing products and develop new
products. Research staff groups provide specialized services in
instrumentation, engineering and process development. 3M also maintains an
organization for technological development not sponsored by other units of the
company.
3M is the owner of many domestic and foreign patents derived primarily from its
research activities. 3M's business as a whole is not materially dependent upon
any one patent, license or trade secret, or upon any group of related patents,
licenses or trade secrets.
The company experienced no significant or unusual problems in the purchase of
raw materials during 2002. It is impossible to predict future shortages of raw
materials or the impact any such shortages would have.
ENVIRONMENTAL LAW COMPLIANCE
Most of 3M's manufacturing operations are affected by federal, state and local
environmental laws. 3M has made, and plans to continue making necessary
expenditures for compliance with applicable laws. 3M is also involved in
remediation actions relating to environmental matters from past operations at
certain sites (refer to Part I, Item 3, Legal Proceedings).
Environmental expenditures relating to existing conditions caused by past
operations that do not contribute to current or future revenues are expensed.
Liabilities for remediation costs are recorded on an undiscounted basis when
they are probable and reasonably estimable, generally no later than the
completion of feasibility studies or the company's commitment to a plan of
action. Environmental expenditures for capital projects that contribute to
current or future operations generally are capitalized and depreciated over
their estimated useful lives.
In 2002, 3M expended about $21 million for capital projects related to the
environment. The comparable amount in 2001 was about $7 million. These
amounts exclude expenditures for remediation actions relating to existing
matters caused by past operations. Capital expenditures for environmental
purposes have included pollution control devices--such as wastewater treatment
plants, groundwater monitoring devices, air strippers or separators, and
thermal oxidizers -- at new and existing facilities constructed or upgraded in
the normal course of business. Consistent with policies stressing
environmental responsibility, average annual capital expenditures (other than
for remediation projects) are presently expected to be about $70 million over
the next two years for new or expanded programs to build facilities or modify
manufacturing processes to minimize waste and reduce emissions.
While we cannot predict with certainty the future costs of such clean-up
activities, capital expenditures or operating costs for environmental
compliance, we do not believe they will have a material effect on our capital
expenditures, earnings or competitive position.
BUSINESS SEGMENTS
Financial information and other disclosures relating to 3M's business
segments and operations in certain geographic areas are provided
in the Notes to Consolidated Financial Statements. 3M's six
business segments bring together common or related 3M technologies,
enhancing the development of innovative products and services and
5
providing for efficient sharing of business resources. These segments have
worldwide responsibility for virtually all 3M product lines. Certain small
businesses and staff-sponsored products, as well as various corporate assets
and unallocated corporate expenses, are not assigned to the business segments.
Transportation, Graphics and Safety Markets: This segment provides reflective
sheeting, high-performance graphics, respirators, automotive components,
security products and optical films.
In transportation safety, 3M provides reflective sheetings used on highway
signs, vehicle license plates, construction workzone devices, trucks and other
vehicles. Major commercial graphic products include equipment, films, inks and
related products used to produce graphics for vehicles and signs. The company
also sells maintenance-free and reusable respirators. Major automotive products
include insulation components for catalytic converters; functional and
decorative graphics; corrosion-resistant and abrasion-resistant films; tapes
for attaching nameplates, trim and moldings; and fasteners for attaching
interior panels and carpeting. Safety and security products include reflective
materials that are widely used on apparel, footwear and accessories, enhancing
visibility in low-light situations. Optical products include brightness
enhancement films for electronic displays. Other products include spill-control
sorbents, Thinsulate brand Insulation and Thinsulate brand Lite Loft brand
Insulation, traffic control devices, electronic surveillance products, and
films that protect against counterfeiting. In 2000 and early 2001, 3M acquired
two touch screen companies, which added product offerings to the Optical
Systems product line. In December 2002, 3M completed its acquisition of
Corning Precision Lens, Inc., a manufacturer of lens systems for projection
televisions. This acquisition also will be part of the Optical Systems product
line.
Health Care Markets: Major product categories include medical and surgical
supplies, infection prevention, microbiology, health information systems,
pharmaceuticals, drug delivery systems, dental and orthodontic products, and
mechanical and tape closures for disposable diapers.
In the medical and surgical area, 3M is a supplier of medical tapes, dressings
and wound closures. In infection prevention, 3M markets a variety of surgical
drapes, masks and preps, as well as sterilization assurance equipment. 3M also
provides microbiology products, which make it faster and easier for food
processors to test the microbiological quality of food. In health information
systems, 3M develops and markets computer software for hospital coding and data
classification, as well as related consulting services. The health care
segment also provides other medical products, including orthopedic casting
materials, electrodes and stethoscopes.
This segment also serves the pharmaceutical and dental markets, as well as
manufacturers of disposable diapers. Pharmaceutical products include immune
response modifiers, and respiratory and women's health products. Other
products include drug-delivery systems, such as metered-dose inhalers,
transdermal skin patches and related components. Dental products include
restoratives, adhesives, finishing and polishing products, crowns, impression
material, preventive sealants, professional tooth whiteners, prophylaxis and
orthodontic appliances. Other products include tape closures for disposable
diapers, and reclosable fastening systems and other diaper components that help
diapers fit better. In early 2001, 3M combined its German dental business with
ESPE Dental AG, a leading German supplier of crowns, bridges and other dental
products, and in December 2002, 3M purchased the remaining 43 percent minority
interest of these operations.
Industrial Markets: Industrial products include a wide variety of coated and
nonwoven abrasives, adhesives, pressure-sensitive tape, and specialty products.
Major product lines include vinyl, polyester, foil and specialty industrial
tapes and adhesives; Scotch brand Masking Tape, Scotch brand Filament and
Packaging Tape; packaging equipment; 3M brand VHB brand Bonding Tapes;
conductive, low surface energy, hot melt, spray and structural adhesives;
reclosable fasteners; label materials for durable goods; coated, nonwoven and
microstructured surface finishing and grinding abrasives; and products for
maintaining and repairing vehicles, boats, airplanes and other vehicles.
6
Consumer and Office Markets: Major consumer and office products include Scotch
brand tapes; Post-it brand Note products, such as Post-it brand flags, Post-it
brand memo pads, Post-it brand labels, and Post-it brand Pop-up notes and
dispensers; home care products, including Scotch-Brite brand Scour Pad,
Scotch-Brite brand Scrub Sponge, Scotch-Brite brand Microfiber Cloth products,
and O-Cel-O brand Sponges and Scotchgard brand Fabric Protectors; energy
control products; nonwoven abrasive materials for floor maintenance and
commercial cleaning; floor matting; and home improvement products, including
surface-preparation and wood-finishing materials, and Filtrete brand Filters
for furnaces and air conditioners. Visual communication products serve the
world's office and education markets with overhead projectors and transparency
films, plus equipment and materials for electronic and multimedia
presentations.
Electro and Communications Markets: This segment serves the electronics,
telecommunications and electrical markets. Major electronic and electrical
products include packaging and interconnection devices; insulating materials,
including pressure-sensitive tapes and resins; and related items. These
products are used extensively by manufacturers of electronic and electrical
equipment, as well as in the construction and maintenance segments of electric
utilities, telecommunications and other industries. 3M Microinterconnect
Circuits utilize electronic packaging and interconnection technology, providing
more connections in less space, and are used in inkjet print cartridges, cell
phones and other electronic devices. This segment serves the world's
telecommunications companies with a wide array of products for fiber-optic and
copper-based telecommunications systems. These products include many
innovative connecting, closure and splicing systems; maintenance products; and
test equipment. In 2000, 3M acquired 91 percent (subsequently increased to 99
percent) of Quante AG, a telecommunications supplier. In the fourth quarter of
2000, 3M also acquired the multi-layer integrated circuit packaging line of
W.L. Gore and Associates, and in early 2001 completed the acquisition of
Robinson Nugent Inc., a manufacturer of electronic interconnects.
Specialty Material Markets: Major specialty materials include protective
materials for furniture and fabrics; firefighting agents; fluoroelastomers for
seals, tubes and gaskets in engines; engineering fluids; and high-performance
fluids used in the manufacture of computer chips, and for electronic cooling
and lubricating of computer hard disk drives. Other products include natural
and color-coated mineral granules for asphalt shingles. In early 2003, 3M
acquired 100 percent of the common shares of Solvay Fluoropolymers, with
manufacturing facilities located in Decatur, Alabama.
In May 2000, 3M announced its intent to substantially phase-out production by
the end of 2000 of the perfluorooctanyl chemistry used to produce certain
repellents and surfactant products. These include many products previously
sold under the Scotchgard brand, such as soil, oil and water repellent
products for carpet, upholstery and fabrics; as well as other products
including coatings used for oil and grease resistance on paper packaging;
fire-fighting foams; and specialty compounds used in the manufacture of other
products. The company has introduced alternatives for certain applications
and industry segments, including carpet protection.
NEW BUSINESS SEGMENTS REPORTING EFFECTIVE JANUARY 1, 2003
In September 2002, 3M announced it would strategically realign its organization
for faster growth and a closer focus on markets and customers. This
realignment resulted in seven new reportable business segments compared to the
current structure of six reportable business segments. These structural changes
were driven by 3M's strategic planning process and represent an important step
toward better access to its markets. Executive vice president appointments were
effective October 1, 2002, but a three-month transition period was provided to
realign the existing organization to the new structure. Internal management
reporting for the new reportable business segments commenced January 1, 2003.
7
EXECUTIVE OFFICERS
Following is a list of the executive officers of 3M, their ages, present
positions, the years elected to their present positions and other positions
held during the past five years. No family relationships exist among any of the
executive officers named, nor is there any arrangement or understanding
pursuant to which any person was selected as an officer.
Year Elected
to Present
Name Age Present Position Position Other Positions Held During 1998-2003
- ---------------------- --- ----------------------- -------- --------------------------------------
W. James McNerney, Jr. 53 Chairman of the Board 2001 President and CEO, General Electric
and Chief Executive Officer Aircraft Engines, Cincinnati, Ohio,
1997-2000
Ronald R. Belschner 63 Vice President, 2000 Division Vice President, Industrial
Engineering, Manufacturing Tape and Specialties Division,
and Logistics 1995-2000
Robert J. Burgstahler 58 Senior Vice President, 2002 Vice President, Finance and
Business Development and Administrative Services, 2000-2002
Corporate Services President and General Manager
3M Canada, 1998-2000
Staff Vice President, Taxes, 1995-1998
Patrick D. Campbell 50 Senior Vice President 2002 Vice President, Finance, General
and Chief Financial Motors Europe, Zurich, Switzerland,
Officer 2001-2002
Executive Director, Investor Relations
and Worldwide Benchmarking, General
Motors, Detroit, Michigan,
2000-2001
Chief Financial Officer, General
Motors International, Zurich,
Switzerland, 1994-1999
Joseph A. Giordano 54 Executive Vice President, 2002 Vice President, Europe and Middle
International Operations East, 2001
Vice President, Asia Pacific,
1999-2001
Regional Vice President, South and
Southeast Asia, 1999
Division Vice President, Electronic
Products Division, 1995-1998
M. Kay Grenz 56 Vice President, 1998 Staff Vice President, Human Resources
Human Resources Consulting and Resource Services,
1996-1998
Jay V. Ihlenfeld 51 Vice President, 2002 Executive Vice President, Sumitomo 3M
Research and Development Limited, 2001-2002
Division Vice President, Performance
Materials Division, 1999-2001
General Manager, Performance Materials
Division, 1999
Steven J. Landwehr 55 Executive Vice President, 2002 Division Vice President, Automotive
Transportation Business Aftermarket Division, 1999-2002
General Manager, Automotive Aftermarket
Division, 1997-1999
Moe S. Nozari 60 Executive Vice President, 2002 Executive Vice President, Consumer and
Consumer and Office Business Office Markets, 1999-2002
Group Vice President, Consumer and
Office Markets Group, 1996-1999
Frederick J. Palensky 53 Executive Vice President, 2002 Executive Vice President, Specialty
Safety, Security and Material Markets and Corporate
Protection Services Services, 2001-2002
Business Vice President and General Manager
3M ESPE, 2001
Division Vice President, Dental
Products Division, 1997-2001
David W. Powell 61 Vice President, Marketing 1999 Division Vice President, Stationery
and Office Supplies Division,
1996-1999
8
EXECUTIVE OFFICERS (continued)
Year Elected
to Present
Name Age Present Position Position Other Positions Held During 1998-2003
- ---------------------- --- ----------------------- -------- --------------------------------------
Charles Reich 60 Executive Vice President, 2002 Executive Vice President, Electro
Health Care Business and Communications Markets, 2001-2002
Executive Vice President, Specialty
Material Markets and Corporate Services,
1999-2001
Group Vice President, Specialty Material
Markets Group, 1999
Group Vice President, Chemical Markets
Group, 1998
Division Vice President, Occupational
Health and Environmental Safety
Division, 1997-1998
Brad T. Sauer 43 Executive Vice President, 2002 Executive Director Six Sigma, 2001-2002
Electro and Communications Managing Director, 3M Korea Ltd.,
Business 1999-2001
New Business Development Director,
Commercial Graphics Division, 1999
General Manager, Medical Solutions
Business, Imation Corp., 1997-1999
James B. Stake 50 Executive Vice President, 2002 Division Vice President, Industrial Tape
Display and Graphics and Specialties Division; and Vice
Business President, Marketing, Industrial
Markets, 2002
Division Vice President, Industrial Tape
and Specialties Division, 2000-2002
Division Vice President, Packaging
Systems Division, 1999-2000
Managing Director, 3M Italy, 1998-1999
Managing Director, 3M Italy and Regional
Managing Director, Southern Europe
Region, 1996-1998
John J. Ursu 63 Senior Vice President 2003 Senior Vice President, Legal Affairs
and General Counsel, 1997-2002
Harold J. Wiens 56 Executive Vice President, 2002 Executive Vice President, Industrial
Industrial Business Markets, 1999-2002
Executive Vice President, Industrial
and Electro Markets, 1999
Executive Vice President, Industrial
and Consumer Markets, 1998-1999
Richard F. Ziegler 53 Senior Vice President, 2003 Partner, Cleary, Gottlieb, Steen
Legal Affairs and and Hamilton, 1983-2002
General Counsel
ITEM 2. PROPERTIES.
3M's general offices, corporate research laboratories, and certain division
laboratories are located in St. Paul, Minnesota. In the United States, 3M has
18 sales offices in 14 states and operates 59 manufacturing facilities in 24
states. Internationally, 3M has 196 sales offices. The company operates 79
manufacturing and converting facilities in 29 countries outside the United
States.
3M owns substantially all of its physical properties. 3M's physical
facilities are highly suitable for the purposes for which they were designed.
Properties are often used by multiple business segments since 3M is an
integrated enterprise characterized by substantial intersegment cooperation
with allocations resulting from the shared utilization of assets.
9
TTEM 3. LEGAL PROCEEDINGS.
GENERAL
- -------
The company and some of its subsidiaries are named defendants in a number of
claims, lawsuits, and governmental proceedings. These include products
liability claims and lawsuits involving products that the company now or
formerly manufactured and sold, and environmental proceedings. Some claimants
seek damages and other relief that, if granted, would require substantial
expenditures.
Some of these lawsuits and proceedings raise difficult and complex factual and
legal issues, and are subject to many uncertainties, such as the facts and
circumstances of the particular lawsuit, the jurisdiction and forum in which
the lawsuit is pending, and the applicable law. The company records
liabilities in those instances where it can reasonably estimate the amount of
the loss and where liability probably will arise. The company also records
receivables for the probable amount of insurance that it expects to recover
under the company's insurance program in those instances.
The company cannot always definitively determine possible liabilities that
exceed recorded amounts related to the legal proceedings to which it is a
party. There can be no certainty that the company may not ultimately incur
charges, whether related to products liability, antitrust, or other
litigation, environmental matters, or other actions, in excess of presently
recorded liabilities. 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 individually or in the aggregate 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. Given the uncertainty of litigation and in making future
projections, the company has and will continue to periodically reexamine its
estimates of probable liabilities and any associated expenses and receivables
and make appropriate adjustments to such estimates based on experience and
developments in the litigation. As a result, 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.
ANTITRUST LITIGATION
- ---------------------
As previously reported, LePage's Inc. filed a lawsuit against the company in
June 1997 in the United States District Court for the Eastern District of
Pennsylvania alleging that certain marketing practices of the company violated
the antitrust laws. On October 8, 1999, the jury awarded LePage's damages of
$22.8 million. The company recorded a pre-tax charge of $73 million in the
third quarter of 1999 related to the adverse jury verdict (the $22.8 million
verdict is automatically tripled under the law) and attorneys' fees and costs.
In January 2002, the Third Circuit Court of Appeals reversed the trial court's
decision and, as a result, the company reversed the $73 million pre-tax
charge. On February 25, 2002, the Third Circuit Court of Appeals vacated its
prior ruling and ordered a re-hearing by the full court. Oral argument on the
appeal was heard on October 30, 2002. The company expects the decision of the
Third Circuit Court of Appeals during the first or second quarter of 2003.
Because the company believes that the trial court judgment will
again be overturned, no liability has been recorded related to this
matter as of December 31, 2002. If the Third Circuit Court of Appeals
affirms the trial court judgment, and the United States Supreme Court
declines to review the case, the company would incur a pre-tax
10
charge of approximately $85 million related to the adverse jury verdict plus
interest. 3M would also be liable for LePage's attorneys' fees and costs, an
amount that has not yet been determined by the court. After the verdict in
the LePage's action, purchasers of transparent tape filed three class action
lawsuits against the company in California and Pennsylvania alleging that
certain marketing practices of the company violated the state or federal
antitrust laws. Those actions are pending.
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 vast majority of claims against the company
have been resolved. Claims against the company registered in the revised
class action settlement program approved by the United States District Court
for the Northern District of Alabama (the "Revised Settlement Program") have
been or will be resolved through the Revised Settlement Program. The company
has confirmed that approximately 7 remaining claimants who have opted out of
the Revised Settlement Program have 3M implants. The company does not consider
its remaining probable liability for these confirmed cases to be material.
The company's insurers providing occurrence-based coverage initiated a
declaratory judgment action in Ramsey County Minnesota against the company
seeking adjudication of certain coverage and allocation issues. 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 trial court's rulings in post verdict motions were generally favorable to
the company. The court awarded the company prejudgment interest on amounts
owing by insurers, including a portion of the company's reasonable attorneys
fees in connection with the insurance coverage litigation. 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. On September 24, 2002, the Minnesota Court of
Appeals affirmed in part and reversed in part the trial court's judgment. The
Court of Appeals confirmed coverage but allocated the coverage so as to reduce
a substantial portion of the amounts owing by insurers for losses and defense
costs as reflected in the trial court judgment. The Court of Appeals also
reversed the company's award of attorneys' fees referenced above. On December
17, 2002, the Minnesota Supreme Court granted the company's Petition for
Review permitting the company to appeal the Court of Appeal's decision. The
company believes that it is likely to obtain relief in the Minnesota Supreme
Court. If the Minnesota Supreme Court does not grant relief as anticipated,
the company could be effectively deprived of significant and potentially
material insurance coverage for breast implant claims.
The company also initiated an arbitration proceeding in London, England, to
recover insurance coverage for some of its breast implant liability and costs
from certain claims-made insurance carriers. A hearing was conducted in
January 2003 and the arbitration is expected to be completed in the second
half of 2003. If the panel decides the coverage question in the company's
favor, it will then determine the amount of coverage in a subsequent
proceeding.
As of December 31, 2002, the company had receivables for insurance recoveries
related to the breast implant matter of $339 million, representing settled but
yet to be received amounts ($16 million), as well as amounts contested by the
insurance carriers in the Minnesota litigation and the London arbitration
($323 million). Various factors could affect the timing and amount of
insurance proceeds to be received under the company's various insurance
policies, including (i) the outcome of occurrence insurance litigation in the
courts of Minnesota (as discussed above); (ii) the outcome of the arbitration
with claims-made insurers in London; and (iii) 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.
11
RESPIRATOR/MASK/ASBESTOS LITIGATION
- -----------------------------------
For more than 20 years, the company has successfully defended and resolved the
claims of over 200,000 individual claimants alleging injuries from
occupational dust exposures. The vast majority of the lawsuits and claims
resolved by the company alleged use of some of the company's mask and
respirator products and sought damages from the company and other defendants
for alleged personal injury from work place exposures to asbestos or, less
frequently, silica and other occupational dust, found in products manufactured
by other defendants. The remaining claimants generally alleged 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.
The company's vigorous defense of this litigation has resulted in: (i) jury
verdicts for the company in two of three cases tried to verdict; (ii)
dismissals of lawsuits without any payment by the company; and (iii) an
average settlement value of less than $1,000 per claimant 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 identified by the
plaintiffs.
As previously reported, in October 2001, the company defended at trial, in the
Circuit Court of Holmes County, Mississippi, plaintiffs' claims that a 3M
respirator and mask did not protect them against contracting certain asbestos-
related diseases allegedly caused by exposure to asbestos-containing products
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, 2001
the jury returned verdicts 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 of the four
verdicts against it is $22.5 million. The company can provide no assurance at
this time about the ability of the other two co-defendants to pay their
respective shares of any ultimate judgment or whether a co-defendant's
inability to pay will cause a reallocation of the liability for damages among
the remaining solvent defendants under state law. One of the co-defendants,
ACandS, has filed for Chapter 11 bankruptcy protection. Another co-defendant,
Dresser Industries, is a subsidiary of Halliburton Company, which announced on
December 18, 2002 a global settlement agreement of all personal injury
asbestos claims against Halliburton Company and its subsidiaries. The company
does not know at this time the impact of the settlement agreement on the
judgment in the Mississippi case against Dresser Industries. Judgment was
entered on January 30, 2002. The trial court denied the company's post-trial
motions in a decision on August 21, 2002, and the company filed a notice of
appeal with the Mississippi Supreme Court. Because the company believes that
the judgment ultimately will be overturned, no liability has been recorded
related to this matter as of December 31, 2002. If any damages are ultimately
assessed against the company, the company expects a substantial portion of
such damages to be covered by the company's product liability insurance.
As of December 31, 2002, the company is a named defendant, with multiple
co-defendants, in numerous lawsuits in various courts that purport to
represent approximately 45,000 individual claimants. The vast majority
of these current claimants allege use of some of the company's mask and
respirator products and seek damages from the company and other defendants
for alleged personal injury from work place exposures to asbestos or,
less frequently, silica and other occupational dust, found in products
manufactured by other defendants. The remaining claimants 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. The company settled an unusually large number of
pending claims during 2002 and thus had a substantial reduction in the number of
12
open claims - from approximately 80,000 claimants at the end of 2001 to
approximately 45,000 at the end of 2002.
In the fourth quarter of 2002, the company was served with complaints
identifying approximately 6,000 claimants in Mississippi. We believe that this
activity is related to tort reform legislation adopted in Mississippi in
November 2002 that went into effect on January 1, 2003, and that the new cases
were filed in anticipation of the new law. We expect to see an additional
increase in Mississippi claims in the first quarter as there is often a delay
between the filing of complaints and service of the complaints on the company.
Plaintiffs have asserted specific dollar claims for damages in only about one-
sixth of the 7,404 lawsuits that were pending against the company at the end
of 2002 in all jurisdictions. A majority of states restrict or prohibit
specifying damages in tort cases such as these, and most of the remaining
jurisdictions do not require such specification. In those cases in which
plaintiffs choose to assert specific dollar amounts in their complaints,
brought in states that permit such pleading, the amounts claimed are typically
not meaningful as an indicator of the company's potential liability. This is
because (a) the amounts claimed typically bear no relation to the level of
plaintiff's injury, if any; (b) the complaints nearly always assert claims
against multiple defendants with the typical complaint asserting claims
against an average of 88 different defendants, the damages alleged are not
attributed to individual defendants, and a defendant's share of liability may
turn on the law of joint and several liability, which can vary by state, and
by the amount of fault a jury allocates to each defendant if a case is
ultimately tried before a jury; (c) many cases are filed against the company
even though the plaintiffs did not use any of the company's products and,
ultimately, are withdrawn or dismissed without any payment; and (d) many cases
are brought on behalf of plaintiffs who have not suffered any medical injury,
and, ultimately, are resolved without any payment or a payment that is a small
fraction of the damages initially claimed. Of the 1,274 pending cases in which
purported damage amounts are specified in the complaints, 579 cases involve
claims of $100,000 or less, 177 cases involve claims between $100,000 and $3
million (37 of these cases also allege punitive damages of $250,000 and 42 of
these cases also allege punitive damages of $2.5 million), 117 cases involve
claims of $7.5 million (with an equal amount of punitive damages), 365 cases
involve claims of $10 million (316 of which also allege an equal amount in
punitive damages), 3 cases involve claims of $15 million, 2 cases involve
claims of $20 million, and 31 cases involve claims of $50 million (5 of which
also allege punitive damages of $5 million). Some complaints allege that the
compensatory and punitive damages are at least the amounts specified. As noted
above, the company has more than 20 years of experience in defending
litigations of this type, and has to date resolved the claims of over 200,000
plaintiffs. The cumulative average settlement amount is less than $1,000 per
claimant. Based on this experience and for the other reasons noted above the
company believes that the damage amounts specified in complaints are not a
meaningful factor in any assessment of the company's potential liability.
As of December 31, 2002, the company had estimated accrued liabilities of
approximately $161 million for respirator/mask asbestos related claims, a
substantial portion of which the company expects to be covered by its product
liability insurance. This amount represents the company's best estimate of
the amount to cover the cost and expense of resolving recently settled,
current and probable future respirator/mask asbestos related claims. The
company also had receivables for expected insurance recoveries of
approximately $264 million. 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) delays
in or avoidance of payment by insurers; and (iii) 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.
The difference between the accrued liability and insurance
receivable represents the time delay between payment of claims and
receipt of insurance reimbursements. Because of the lag time between
settlement and payment of a claim, no meaningful conclusions may be
drawn from quarterly changes in the amount of receivables for
13
expected insurance recoveries and the quarterly changes in the number of
claimants at the end of each quarter.
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. Recent developments in the mix of newly
filed respirator/mask lawsuits (some increase in the proportion of silica-
related claims) and the defense costs associated with the company's continued
aggressive defense strategy will be closely monitored by the company in the
near term. Additional 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) significant changes in the legal costs of defending these
claims and in maintaining trial readiness, (iv) changes in the nature of
claims received, (v) changes in the law and procedure applicable to these
claims, (vi) financial viability of other co-defendants and insurers, and
(vii) 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. As of December 31, 2002,
the company had recorded liabilities of $37 million for estimated
environmental investigatory and remediation costs based upon an evaluation of
currently available facts with respect to each individual site.
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 such
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)
14
changes in the information available regarding the environmental impact
of the company's operations and products; (ii) changes in environmental
regulations or enforcement policies, including efforts to recover
natural resource damages; (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.
The company has been voluntarily cooperating with ongoing reviews by the
Environmental Protection Agency (EPA) and international agencies of the
possible environmental and health effects of perfluorooctanyl chemistry. As
previously announced, the company has been phasing out its production of such
compounds. With respect to one such compound the EPA is currently considering
possible regulatory action under its statutory authority relating to compounds
that may pose possible human health effects. The company recently confirmed
to the EPA its intent to continue its ongoing health and environmental
investigation and assessment of this compound. As a result of its phase-out
decision, the company no longer manufactures that compound except that a
subsidiary produces limited quantities for its own industrial use. The
company cannot predict what regulatory action, if any, may be taken regarding
some or all of such compounds or the consequences of any such action.
On September 30, 2002, a former employee filed an amended complaint against
the company in the Circuit Court of Morgan County, Alabama seeking unstated
compensatory and punitive damages and alleging that the plaintiffs suffered
fear, increased risk and sub clinical injuries from exposure to
perfluorooctanyl chemistry at or near the company's Decatur, Alabama
manufacturing facility. The complaint also alleges that the company acted
improperly with respect to disclosures to workers concerning such chemistry.
Recently, the plaintiffs sought to add as plaintiffs another former employee,
a current employee and their minor children. The company believes that these
allegations have no merit and is vigorously defending these claims.
The company has agreed to enter into a consent agreement with the State of New
York Department of Environmental Conservation for alleged violations of the
New York air emissions regulations. The proposed agreement calls for a penalty
of $212,000, a portion of which will be used to improve processes at the
company's Tonawanda, New York manufacturing facility.
As previously reported, the company entered into a voluntary agreement with
the EPA under both an "Agreement for TSCA Compliance" and the EPA's Incentives
for Self Policing Policy. The company voluntarily conducted an audit under
the Toxic Substances Control Act (TSCA) of its facilities and business units
and to identify studies that under current EPA guidelines could be potentially
subject to notification under TSCA section 8(e). The company has reached an
agreement in principle with the EPA under which it would pay $222,000 in
penalties in connection with the first two phases of this audit relating to
perfluorooctanyl chemistry studies. The third phase, relating to this and
other chemistries, is expected to be completed in early 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None in the quarter ended December 31, 2002.
15
PART II
ITEM 5. MARKET PRICE OF 3M'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
At January 31, 2003, there were approximately 125,216 shareholders of record.
3M's stock is listed on the New York, Pacific, Chicago and Swiss stock
exchanges. Cash dividends declared and paid totaled $.62 per share for each
quarter of 2002, and $.60 per share for each quarter of 2001. Stock price
comparisons follow.
- -----------------------------------------------------------------------------
Stock price comparisons (NYSE composite transactions)
First Second Third Fourth
(Per share amounts) Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------
2002 High $123.70 $130.60 $130.09 $131.55 $131.55
2002 Low 100.00 112.30 108.20 110.75 100.00
2001 High $121.50 $127.00 $117.50 $121.90 $127.00
2001 Low 98.50 97.16 85.86 95.20 85.86
- -----------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA.
- ------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts)
Years ended December 31: 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net sales........................... $16,332 $16,054 $16,699 $15,723 $15,094
Income from continuing operations... 1,974* 1,430* 1,857* 1,763** 1,213**
Per share of common stock:
Continuing operations - basic..... 5.06* 3.63* 4.69* 4.39** 3.01**
Continuing operations - diluted... 4.99* 3.58* 4.64* 4.34** 2.97**
Cash dividends declared and paid.. $ 2.48 $ 2.40 $ 2.32 $ 2.24 $ 2.20
At December 31:
Total assets ....................... $15,329 $14,606 $14,522 $13,896 $14,153
Long-term debt (excluding portion due
within one year).................. 2,140 1,520 971 1,480 1,614
- -------------------------------------------------------------------------------------
The above income and earnings per share information exclude an extraordinary
loss in 1998 ($38 million, or $.09 per diluted share), and the cumulative
effect of accounting change in 2000 ($75 million, or $.19 per diluted share).
*As discussed in the Notes to Consolidated Financial Statements, 2002 includes
non-recurring net losses of $202 million ($108 million after tax and minority
interest), or 27 cents per diluted share, related to charges in connection with
3M's restructuring plan. 2001 includes non-recurring net losses of $504
million ($312 million after tax and minority interest), or 78 cents per diluted
share, principally related to charges in connection with 3M's restructuring
plan, acquisition-related charges, a reversal of a 1999 litigation accrual, and
a net gain related to the sale of available-for-sale equity securities,
partially offset by the write-down of available-for-sale equity securities.
2000 includes non-recurring net losses of $23 million ($15 million after tax),
or 4 cents per diluted share, related to charges recorded for the company's
phase-out of its perfluorooctanyl-based chemistry products in the Specialty
Material segment, a write-down of certain corporate and unallocated assets,
gains related to corporate and unallocated asset dispositions, a gain from the
termination of a product distribution agreement in the Health Care segment, and
other non-recurring items.
** 1999 includes a net gain of $100 million ($52 million after tax), or 13
cents per diluted share, related to gains on divestitures, litigation expense,
an investment valuation adjustment, and a change in estimate that reduced 1998
restructuring charges. 1998 includes restructuring charges of $493 million
($313 million after tax), or 77 cents per diluted share.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 or region;
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; obtain
adequate intellectual property protection; gain market acceptance of new
products, or successfully complete clinical trials and obtain regulatory
approvals. As with any pharmaceutical under development, there are substantial
risks and uncertainties in the process of development and regulatory review.
There are no guarantees that products will receive regulatory approvals or
prove to be commercially successful.
* The company's future results are subject to fluctuations in the costs of
purchased components and materials due to market demand, currency exchange
risks, shortages and other factors. The company depends on various components
and materials for the manufacturing of its products. Although the company has
not experienced any difficulty in obtaining components and materials, it is
possible that any of its supplier relationships could be terminated in the
future. Any sustained interruption in the company's receipt of adequate
supplies could have a material adverse effect on 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 make acquisitions,
divestitures and strategic alliances. However, there can be no absolute
assurance that these will be completed or beneficial to the company.
17
* 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 I, Item 3 of this
Annual Report on Form 10-K.
CRITICAL ACCOUNTING ESTIMATES
As stated in our significant accounting policies in Note 1 to the Consolidated
Financial Statements, the preparation of financial statements requires
management to make estimates and assumptions. The company believes its most
critical accounting estimates relate to legal proceedings, potential asset
impairment issues, and the company's pension and postretirement obligations.
Legal Proceedings:
The company's core activities relate to the development, manufacture and sale
of thousands of products to numerous markets. While this risk dispersion
provides a measure of overall stability, it also results in legal risks in
some areas. The company records liabilities in those instances where it can
reasonably estimate the amount of the loss and where liability probably will
arise. The company also records receivables for the probable amount of
insurance that it expects to recover under the company's insurance program in
those instances. The company cannot always definitively determine possible
liabilities that exceed recorded amounts related to the legal proceedings to
which it is a party. There can be no certainty that the company may not
ultimately incur charges, whether related to products liability, antitrust, or
other litigation, environmental matters, or other actions, in excess of
presently recorded liabilities. 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 individually or in the aggregate to its
consolidated financial position, results of operations or cash flows.
Known legal risks include the ultimate collection of breast implant insurance
receivables (a matter currently in dispute with the company's insurance
carriers), respirator/mask/asbestos insurance receivables collection and
probable liabilities, and an outstanding lawsuit filed by LePage's
Incorporated that extends back to 1997.
Summary amounts concerning the breast implant and respirator/mask/asbestos
litigation follow.
- ----------------------------------------------------------------------
At December 31 2002 2001 2000
(Millions)
- ----------------------------------------------------------------------
Breast implant receivables $339 $406 $519
Breast implant liabilities $ 5 $ 20 $ 32
Respirator/Mask/Asbestos receivables $264 $223 $155
Respirator/Mask/Asbestos liabilities $161 $156 $108
- ----------------------------------------------------------------------
At December 31, 2002, the company has accrued receivables of $339 million
relating to breast implants. Of this $339 million, $16 million represents
settled but yet to be received amounts, while $323 million has been contested
by insurance carriers. The company believes that it is likely to obtain
relief in the Minnesota Supreme Court. If the Minnesota Supreme Court does
not grant relief as anticipated, the company could be effectively deprived of
significant and potentially material insurance coverage for breast implant
claims. As part of the company's efforts to recover the amounts contested by
the insurance carriers, the company also initiated an arbitration proceeding
in London, England, to recover insurance coverage for breast implant
liability and costs from claims-made insurance carriers. The arbitration
hearing will first consider whether the policy provides insurance coverage
for the company's breast implant liability and costs. If the panel favorably
decides the coverage question for the company, it will then determine the
amount of coverage in a subsequent hearing later in 2003.
18
The company's remaining respirator/mask/asbestos liability is $161 million at
December 31, 2002. This estimate represents the company's best estimate of
its liability. If amounts are paid in settlement of claims or if any damages
are ultimately assessed against the company in current or future litigation, a
substantial portion of such amounts is expected to be covered by the company's
product liability insurance. 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) delays in or avoidance of payment by insurers; and (iii) the extent to
which insurers may become insolvent in the future. There can be no certainty
that the company will collect all amounts recorded as being probable of
recovery from its insurers.
3M has not recorded any liability for the LePage's Incorporated litigation as
of December 31, 2002. 3M expects to prevail in this litigation, but if 3M
does not prevail, 3M would incur a pre-tax charge of approximately $85
million. 3M would also be potentially liable for LePage's attorneys' fees and
costs.
Potential Asset Impairment Issues:
There are estimates and assumptions made by management in preparing the
consolidated financial statements for which actual results will emerge over
long periods of time. This includes the recoverability of long-lived assets
employed in the business, including assets of acquired businesses. These
estimates and assumptions are closely monitored by management and periodically
adjusted as circumstances warrant. For instance, expected asset lives may be
shortened or an impairment recorded based on a change in the expected use of
the asset or performance of the related business reporting unit. Although
there is greater risk with respect to the accuracy of these long-term
estimates and assumptions because of the long period over which actual results
will emerge, such risk is mitigated by management's ability to make changes in
these estimates and assumptions over the same long period. 3M has
approximately $1.9 billion of goodwill that, based on impairment testing, is
not impaired. A portion of this goodwill (approximately $220 million) is in
3M's telecommunications business, which the company believes will maintain its
value. However, if unanticipated events impact this sector for an extended
period of time, it could create future impairment losses.
Pension and Postretirement Obligations:
Pension expense impacted 2002 earnings by 16 cents per diluted share compared
with pension expense of 8 cents per diluted share in 2001. The company expects
pension expense to increase approximately another 10 cents per diluted share
in 2003, largely attributed to unrecognized losses on pension assets related
to equity market weakness the last few years. In accounting for pension and
postretirement benefits, costs and related liabilities are developed using
actuarial valuations. These valuations include key assumptions determined by
management, including the discount rate and expected long-term rate of return
on plan assets. For the United States pension plan expense calculation for
2003, the company's long-term rate of return on asset assumption remains at 9
percent and its year-end 2002 discount rate assumption is 6.75 percent (which
is used for 2003 expense calculations), which represents a half percentage
point reduction from the year-end 2001 discount rate. The discount rate
decrease is consistent with changes in high-quality long-term corporate bond
indices. The expected long-term rate of return assumption considers the asset
mix of the plans (approximately 70 percent equity securities and 30 percent
fixed income), past performance, and other factors. Estimates and assumptions
concerning the company's pension and postretirement obligations and related
periodic cost can be found in Note 14 to the Consolidated Financial
Statements. Material changes in pension and postretirement benefit costs may
occur in the future due to changes in these assumptions. Future annual
amounts could be impacted by changes in the number of plan participants,
changes in the level of benefits provided, changes in the discount rates,
changes in the expected long-term rate of return, changes in the level of
contributions to these plans and other factors. A quarter percentage point
change in the discount rate would impact 3M's pension expense by approximately
$32 million on a pre-tax basis. A quarter percentage point change in the
expected long-term rate of return would impact 3M's pension expense by
approximately $23 million on a pre-tax basis.
19
Based on a critical assessment of its accounting policies and the underlying
judgments and uncertainties affecting the application of those policies,
management believes that the company's consolidated financial statements
provide a meaningful and fair perspective of the company. This is not to
suggest that other general risk factors, such as changes in worldwide economic
conditions, fluctuations in foreign currency exchange rates, achievement of
corporate growth objectives, changes in material costs, performance of
acquired businesses and others, could not adversely impact the company's
consolidated financial position, results of operations and cash flows in
future periods.
OPERATING RESULTS
Overview:
Net income totaled $1.974 billion, or $4.99 per diluted share, compared with
$1.430 billion, or $3.58 per diluted share, in 2001, and $1.782 billion, or
$4.45 per diluted share, in 2000. In the first half of 2002, net income was
impacted by non-recurring charges of $108 million, or 27 cents per diluted
share, related to the company's restructuring program that was approved in June
2001. In 2002, currency effects reduced earnings by 8 cents per diluted share,
while the adoption of a new accounting standard resulting in the cessation of
goodwill amortization and other indefinite-lived intangible asset amortization
increased earnings by 12 cents per diluted share. In 2001, net income was
impacted by non-recurring charges of $312 million, or 78 cents per diluted
share, primarily related to the restructuring program approved in June 2001.
In 2000, net income was impacted by non-recurring charges of $90 million, or 23
cents per diluted share. Additional details concerning non-recurring items
follow.
Non-recurring items:
In January 2003, the Securities and Exchange Commission issued Regulation G,
"Conditions for Use of Non-GAAP Financial Measures" a rule directed by the
Sarbanes-Oxley Act of 2002. This rule requires public companies that disclose
or release non-GAAP financial measures to include the most directly comparable
GAAP financial measure, to provide a reconciliation of the disclosed non-GAAP
measure to the most comparable GAAP measure, and requires companies to furnish
earnings releases or similar announcements to the Commission on Form 8-K.
This rule will apply to all subject disclosures as of March 28, 2003. The
rule also provides guidance on what constitutes "non-recurring, infrequent, or
unusual" as applied to specific financial transactions or events. The company
currently provides reconciliations of its disclosed non-GAAP financial
reporting to the most comparable GAAP financial reporting.
In addition to Regulation G, the SEC amended Item 10 of Regulation S-K to
provide additional guidance to registrants that include non-GAAP financial
measures in SEC filings. This guidance would prohibit the presentation of
certain non-GAAP financial measures that exclude from reported results non-
recurring, infrequent or unusual items when the nature of the charge or gain
is such that is it reasonably likely to recur within two years or there was a
similar charge or gain within the prior two years. This guidance could result
in changes in the company's future presentation of non-GAAP financial
measures.
In 2002, non-recurring charges reduced operating income by $202 million and net
income by $108 million. These charges principally related to employee
severance and benefit costs, accelerated depreciation charges, and other
associated exit costs under the company's restructuring plan announced in June
2001. These charges are included in cost of sales ($121 million); selling,
general and administrative expenses ($77 million); and research, development
and related expenses ($4 million). Of the total 2002 charges, $111 million
related to employee severance and benefit costs, $47 million related to
accelerated depreciation of property, plant and equipment (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 the plan.
Additional information concerning non-recurring items is provided in the
Notes to Consolidated Financial Statements and elsewhere herein.
20
In 2001, non-recurring items reduced operating income by $504 million and net
income by $312 million, or 78 cents per diluted share. Non-recurring items of
$569 million, principally related to the company's restructuring plan approved
in June 2001, were included in cost of sales ($249 million); selling, general
and administrative expenses ($300 million); and research, development and
related expenses ($20 million). Of this $569 million, $472 million related to
employee severance and benefits, $80 million related to accelerated
depreciation of property, plant and equipment, and $17 million related to other
exit activities. In addition, cost of sales included other non-recurring costs
of $23 million related to acquisitions. Non-recurring items included in the
other expense (income) line within operating income included $73 million of
income due to the reversal of a 1999 litigation accrual related to 3M's
successful appeal in January 2002 in an antitrust case brought by LePage's Inc.
On February 25, 2002, the Third Circuit Court of Appeals vacated its prior
ruling and ordered a re-hearing in May 2002 by the full court. Oral arguments
on the appeal were heard on October 30, 2002, and the company expects a
decision in 2003. However, the company continues to believe that it will
ultimately prevail in the outcome of this matter. Also included within the
other expense (income) line within operating income is a net gain of $15
million related to the sale of available-for-sale equity securities, partially
offset by the write-down of permanently impaired available-for-sale equity
securities.
In 2000, non-recurring items reduced net income by $90 million, or 23 cents per
diluted share. Operating income was reduced by $23 million, including costs of
$208 million (reported in cost of sales) and gains of $185 million, and
reported in the other expense (income) line within operating income. Non-
recurring costs in 2000 included $168 million of costs in the Specialty
Material segment related to the company's phase-out of perfluorooctanyl-based
chemistry products, a $20 million write-down of corporate and unallocated
assets, and $20 million of other non-recurring expenses ($13 million related to
acquisitions in the Electro and Communications segment). Major non-cash costs
included in the previously mentioned items were $73 million of accelerated
depreciation and $48 million of impairment losses, primarily related to
production equipment used to manufacture products phased out in the Specialty
Material segment. Non-recurring gains in 2000 were largely related to asset
dispositions, principally the sale of available-for-sale equity securities, and
also included $50 million from the termination of a product distribution
agreement in the Health Care segment. A cumulative effect of accounting change
that related to a change in the company's revenue recognition policy was also
recorded in 2000, reducing net income by $75 million.
Pro forma amounts (excluding non-recurring items):
The company believes that discussion of results excluding significant non-
recurring items provides a useful analysis of ongoing operating trends. The
pro forma amounts (which exclude non-recurring items) that follow are not in
accordance with, or preferable to, amounts determined in conformity with U.S.
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 U.S. generally accepted accounting
principles. There is discussion of operating measures that exclude non-
recurring items within this "Operating Results" section. The determination of
non-recurring items may not be comparable to similarly titled measures used by
other companies. An (#) is used to cross-reference such subsequent discussion
to this paragraph.
21
The tables that follow show amounts excluding non-recurring items, non-
recurring items, and the reported amounts for years 2002, 2001 and 2000.
- -------------------------------------------------------------------------------
Supplemental Unaudited Consolidated Statement of Income Information
Years ended December 31
(Amounts in millions, except per share amounts)
2002 2001
- -----------------------------------------------------------------------------------
Excluding Excluding
non- Non- non- Non-
recurring recurring REPORTED recurring recurring REPORTED
items(#) items TOTAL items(#) items TOTAL
- -----------------------------------------------------------------------------------
Net sales $16,332 $ -- $16,332 $16,054 $ -- $16,054
- -----------------------------------------------------------------------------------
Operating expenses
Cost of sales 8,375 121 8,496 8,477 272 8,749
Selling, general and
administrative
expenses 3,643 77 3,720 3,736 300 4,036
Research, develop-
ment and related
expenses 1,066 4 1,070 1,064 20 1,084
Other expense
(income) -- -- -- -- (88) (88)
- -----------------------------------------------------------------------------------
Total 13,084 202 13,286 13,277 504 13,781
- -----------------------------------------------------------------------------------
Operating
income (loss) 3,248 (202) 3,046 2,777 (504) 2,273
Interest expense
and (income), net 41 -- 41 87 -- 87
- -----------------------------------------------------------------------------------
Income (loss) before
income taxes and
minority interest 3,207 (202) 3,005 2,690 (504) 2,186
Provision (benefit)
for income taxes 1,042 (76) 966 886 (184) 702
Effective tax rate 32.5% 32.1% 32.9% 32.1%
Minority interest 83 (18) 65 62 (8) 54
- -----------------------------------------------------------------------------------
Net income (loss) $ 2,082 $(108) $ 1,974 $ 1,742 $(312) $ 1,430
- -----------------------------------------------------------------------------------
Weighted average
diluted shares 395.5 399.9
Net income per
diluted share $ 4.99 $ 3.58
- -----------------------------------------------------------------------------------
(#) Refer to discussion in pro forma amounts paragraph of this section
22
- --------------------------------------------------------------------
Supplemental Unaudited Consolidated Statement of Income Information
Year ended December 31
(Amounts in millions, except per share amounts)
2000
- --------------------------------------------------------------------
Excluding
non- Non-
recurring recurring REPORTED
items(#) items TOTAL
- --------------------------------------------------------------------
Net sales $16,699 $ -- $16,699
- --------------------------------------------------------------------
Operating expenses
Cost of sales 8,579 208 8,787
Selling, general and
administrative
expenses 3,938 -- 3,938
Research, develop-
ment and related
expenses 1,101 -- 1,101
Other expense
(income) -- (185) (185)
- --------------------------------------------------------------------
Total 13,618 23 13,641
- --------------------------------------------------------------------
Operating
income (loss) 3,081 (23) 3,058
Interest expense
and (income), net 84 -- 84
- --------------------------------------------------------------------
Income (loss) before
income taxes and
minority interest
and cumulative
effect of account-
ing change 2,997 (23) 2,974
Provision (benefit)
for income taxes 1,033 (8) 1,025
Effective tax rate 34.5% 34.5%
Minority interest 92 -- 92
- --------------------------------------------------------------------
Income (loss)
before cumulative
effect of account-
ing change $ 1,872 $ (15) $ 1,857
Cumulative effect
of accounting
change -- (75) (75)
- --------------------------------------------------------------------
Net income (loss) $ 1,872 $ (90) $ 1,782
- --------------------------------------------------------------------
Weighted average
diluted shares 399.9
Net income per
diluted share $ 4.45
- --------------------------------------------------------------------
(#) Refer to discussion in pro forma amounts paragraph of this
section
23
Net Sales:
- ------------------------------------------------------------------------------
Components of Net Sales Change
2002 2001
W.W. U.S. Intl. W.W. U.S. Intl.
- ------------------------------------------------------------------------------
Volume - core 1.0% (1.6)% 3.2% (3.5)% (6.8)% (0.7)%
Volume - acquisitions
and divestitures 0.4 0.4 0.4 2.6 2.1 3.0
Price 0.2 (0.1) 0.5 0.3 0.7 0.1
Translation 0.1 -- 0.3 (3.3) -- (6.2)
- ------------------------------------------------------------------------------
Total 1.7% (1.3)% 4.4% (3.9) (4.0) (3.8)%
- ------------------------------------------------------------------------------
Worldwide net sales in 2002 totaled $16.332 billion, compared with $16.054
billion in 2001 and $16.699 billion in 2000. In 2002, core volume (which
excludes acquisition and divestiture impacts) increased 1.0 percent.
Acquisitions increased net sales by four-tenths of one percent. Selling prices
were up two-tenths of one percent. Changes in the value of the U.S. dollar
increased worldwide net sales by one-tenth of one percent. In the United
States, net sales for 2002 totaled $7.426 billion, with core volume down 1.6
percent. International net sales for 2002 totaled $8.906 billion (up 4.4
percent in U.S. dollars), with core volume up 3.2 percent.
In 2001, core volume declined by 3.5 percent. Acquisitions increased net sales
by 2.6 percent. The stronger U.S. dollar reduced sales by 3.3 percent. In the
United States, sales totaled $7.523 billion, down 4 percent from 2000. U.S.
core volume declined 6.8 percent. Internationally, sales totaled $8.531
billion, down 3.8 percent from 2000. International core volume declined seven-
tenths of one percent. The stronger U.S. dollar reduced international sales by
6.2 percent.
Costs:
- -----------------------------------------------------------------------------
Reported (Percent of sales) 2002 2001 2000
- -----------------------------------------------------------------------------
Cost of sales 52.0 54.5 52.6
Selling, general and administrative expenses 22.8 25.1 23.6
Research, development and related expenses 6.5 6.8 6.6
Operating income 18.7 14.2 18.3
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Excluding non-recurring items (#)
(Percent of Sales) 2002 2001 2000
- -----------------------------------------------------------------------------
Cost of sales 51.3 52.8 51.4
Selling, general and administrative expenses 22.3 23.3 23.6
Research, development and related expenses 6.5 6.6 6.6
Operating income 19.9 17.3 18.4
- -----------------------------------------------------------------------------
Cost of sales for 2002 was 52.0 percent of net sales, down 2.5 percentage
points from 2001. Excluding non-recurring charges, cost of sales for 2002 was
51.3 percent(#) of sales, down 1.5 percentage points from 2001. Gross margins
were positively impacted by improved plant efficiencies, lower raw material
costs and 3M's global sourcing initiative. In 2001, slowing worldwide market
demand and negative currency impacts reduced gross margins. Cost of sales
includes manufacturing, engineering and freight costs.
Selling, general and administrative (SG&A) expenses for 2002 were 22.8 percent
of net sales, down 2.3 percentage points from 2001. Excluding non-recurring
charges, SG&A expenses were 22.3 percent(#) of net sales, a decrease of
1.0 percentage point from 2001. Excluding non-recurring items, SG&A
spending totaled $3.643 billion(#) in 2002, a decrease of 2.5 percent
from 2001. This improvement in SG&A costs was the result of implementing
Six Sigma, indirect cost control programs (controlling those expenses not
directly associated with 3M products and services) and employment
reductions under the restructuring plan approved in June 2001. SG&A
also benefited by $67 million due to the cessation of goodwill amortization
and other indefinite-lived asset amortization effective January 1, 2002.
Excluding non-recurring charges in 2001, SG&A was 23.3 percent(#) of
sales, which was a decrease of three-tenths of one percentage point from
24
the prior year. This decrease in 2001 spending was due to cost
savings generated from 3M's indirect cost initiative and lower employment
levels.
Operating income:
Operating income is used by 3M as one of its primary business segment
performance measurement tools. Operating income excludes interest expense,
interest income, the provision for income taxes and minority interest.
Operating income in 2002 was 18.7 percent of net sales, compared with 14.2
percent in 2001. Excluding non-recurring charges, operating income in 2002 was
19.9 percent(#) of net sales, compared with 17.3 percent(#) in 2001. Although
the company faced continued economic weakness, operating income excluding non-
recurring items grew by $471 million, or 17.0 percent, from 2001. The cessation
of goodwill amortization and other indefinite-lived asset amortization
benefited operating income by $67 million, while currency impacts reduced
operating income by an estimated $60 million. Excluding non-recurring items,
2001 operating income totaled $2.777 billion(#), or 17.3 percent(#) of sales,
compared to 18.4 percent(#) of sales in 2000. This decrease was due to slowing
worldwide market demand, and negative currency effects. Excluding non-
recurring items, operating income margins in 2002 were 15.9 percent(#) in the
United States and 23.2 percent(#) internationally.
Interest expense and income:
Net interest expense (interest expense less interest income) in 2002 was $41
million, which was $46 million lower than the prior year. Interest expense was
$80 million in 2002, $124 million in 2001, and $111 in 2000. Declining rates
on floating-rate debt drove the reduction in expense in 2002. The increase in
2001 reflected higher average debt levels, partially offset by lower interest
rates. Interest income was $39 million in 2002, $37 million in 2001 and $27
million in 2000. The increase in both 2002 and 2001 interest income primarily
related to larger average cash balances.
Provision for income taxes:
The worldwide effective income tax rate for 2002 was 32.1 percent, the same as
2001. Excluding non-recurring items, the worldwide effective income tax rate
in 2002 was 32.5 percent(#), down from 32.9 percent(#) the prior year.
Excluding non-recurring items, the tax rate decrease compared to total year
2001 was primarily due to a lower average effective tax rate for international
operations. The effective tax rate in 2000 was 34.5 percent. The effective tax
rate decrease in 2001 when compared to 2000 related to the impact of recurring
tax credits on lower profit levels.
Minority interest:
Minority interest expense was $65 million in 2002, $54 million in 2001 and $92
million in 2000. Excluding non-recurring items, minority interest was $83
million(#) in 2002 and $62 million(#) in 2001. Minority interest represents the
elimination of the non-3M ownership interests, primarily in Sumitomo 3M Limited
and 3M Inter-Unitek GmbH (in 2002 and 2001 only). The increase in 2002 related
primarily to higher profits in Sumitomo 3M and 3M Inter-Unitek GmbH. The
decrease in 2001 was driven by lower profits in Sumitomo 3M. In 2003, 3M
expects lower minority interest expense. This reduction is expected due to the
purchase of the minority interest shares of 3M Inter-Unitek GmbH in December
2002 and the purchase of an additional 25 percent ownership interest in
Sumitomo 3M in early 2003. Refer to Note 3 in the Consolidated Financial
Statements for additional information on these acquisitions.
Net income:
Net income totaled $1.974 billion, or $4.99 per diluted share, compared
with $1.430 billion, or $3.58 per diluted share, in 2001, and $1.782 billion,
or $4.45 per diluted share, in 2000. Non-recurring charges negatively
impacted net income by $108 million, or 27 cents per diluted share,
in 2002, $312 million, or 78 cents per diluted share, in 2001, and
$90 million, or 23 cents per diluted share, in 2000. The cessation of
goodwill amortization and other indefinite-lived asset amortization
effective January 1, 2002, increased earnings per diluted share by 12 cents
in 2002. In 2002, 2001 and 2000, 3M estimates that currency effects reduced
net income by $35 million (8 cents per diluted share), $94 million (24 cents
per diluted share) and $55 million (14 cents per diluted share), respectively.
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
25
foreign currency exchange rate risks. In 2002, derivative and other
transactions gains and losses decreased net income by $25 million.
Derivative and other transactions gains and losses increased net income by
$29 million in 2001 and increased net income by $21 million in 2000.
Employment:
At December 31, 2002, employment totaled 68,774 people, a decrease of 2,895
people from year-end 2001. Since March 31, 2001, employment has declined by
approximately 8,900 people, with 6,900 of the decline related to the
restructuring plan, and 3,500 of the decline due to the integration of
acquisitions and attrition. These decreases were partially offset by the
Corning Precision Lens, Inc. acquisition in the fourth quarter of 2002 that
added about 1,500 people. Sales per employee in local currencies increased
about 9 percent in 2002, decreased about 3 percent in 2001, and increased about
7 percent in 2000.
Operating initiatives:
The company will continue to press ahead with its five corporate initiatives
(Six Sigma, Global Sourcing Effectiveness, 3M Acceleration, Indirect Cost
Reduction and eProductivity) aimed at accelerating long-term top-line growth,
improving cash efficiency and lowering its total cost structure. Six Sigma
focuses on higher growth, lower costs and greater cash flow. Global Sourcing
Effectiveness generates savings through buying smarter, managing supply
agreements, geographic broadening and e-applications. 3M Acceleration
reallocates research and development resources to larger, more global projects.
Indirect Cost Reduction focuses on reducing costs not directly associated with
products or services. In eProductivity, 3M believes it has a significant
digitization opportunity. The company estimates that these initiatives
provided a combined benefit on a pre-tax basis of more than $500 million in
2002. In 2003, the company estimates these initiatives could contribute on
a pre-tax basis an additional $300 million compared to 2002. There can be no
assurance that all of the estimated cost savings from such activities will be
realized. Numerous factors may create offsets to these savings, such as the
potential for continued weakness in sales volumes, normal increases in
compensation and benefits, and other inflationary pressures.
Restructuring charges:
During the first half of 2001, the company developed and announced a
restructuring plan that consolidates certain operations and streamlines the
organization to increase speed and productivity. In June 2001, the company
completed the identification of the significant actions to be taken and
obtained approvals from the appropriate level of management. In the fourth
quarter of 2001, the company obtained approvals for certain additional actions.
These actions were substantially completed by June 30, 2002.
In the first six months of 2002, 3M incurred $202 million of pre-tax expenses
relating to the restructuring plan. The 2002 charges relate to employee
severance and benefits ($111 million), accelerated depreciation ($47 million)
and other ($44 million). During 2001, 3M incurred $569 million of pre-tax
expenses principally related to the restructuring plan. The 2001 charges relate
to employee severance and benefits ($472 million), accelerated depreciation
($80 million) and other ($17 million). The company has not discontinued any
major product lines as a result of this restructuring.
In connection with its restructuring plan, the company eliminated a total of
about 6,900 positions. These positions represent a wide range of functions
throughout the company. Of the 6,900 employment reduction for the total plan,
about 45 percent occurred in the United States, 30 percent in Europe, and the
balance in other international areas. All business segments were impacted
directly and also indirectly through reduced allocations of corporate staff
service costs. The impact of the total restructuring, including the allocated
portion of restructured staff services, is estimated by segment as follows:
Industrial, 35 percent; Electro and Communications, 20 percent; Transportation,
Graphics and Safety, 20 percent; Health Care, 10 percent; Consumer and Office,
10 percent; and Specialty Material, 5 percent. These estimates are provided
only as a frame of reference as to the order of magnitude by segment. In order
to enhance segment comparability and reflect management's focus on ongoing
operations, these restructuring costs have not been recorded in the individual
business segments.
26
Related to this restructuring plan, the company estimates it saved on a pre-
tax basis $300 million in 2002, in addition to the $80 million saved in 2001.
The company estimates an additional $120 million of incremental savings on a
pre-tax basis in 2003. The majority of the savings will be reduced employee
costs. The 2002 savings were spread across cost of sales, SG&A, and research,
development and related expenses. The 2001 savings were most prominent in
SG&A, with cost of sales benefits occurring in late 2001. Numerous factors may
create offsets to these savings, such as the potential for continued weakness
in sales volumes, normal increases in compensation and benefits, and other
inflationary pressures.
Of the company's remaining current liability at December 31, 2002, $30 million
is classified in current liabilities (payroll) and $18 million is classified in
other current liabilities on the Consolidated Balance Sheet. The company
classified as long-term liabilities $43 million of its 2002 charges and $124
million of its 2001 charges. Special termination pension and medical benefits,
aggregating $43 million in 2002 and $62 million in 2001, were offered to
eligible employees. These benefits will generally be paid over their life
expectancies. In addition, of the $62 million in separation pay that was
deferred in 2001, $47 million was reclassified to current in 2002. The company
also recorded $3 million of non-cash stock option expense ($8 million in 2001)
due to the reclassification of certain employees age 50 and older to retiree
status, resulting in a modification of their original stock option awards for
accounting purposes. The current liabilities and a portion of the non-current
liabilities will be funded through cash provided by operations, while funding
for certain long-term special termination pension and medical liabilities will
be provided through established pension and postretirement trust funds. The
majority of the long-term portion of the liability, primarily special
termination pension and medical liabilities, is reflected as a component of
3M's pension and medical trust plans as a portion of the Accumulated Benefit
Obligation (ABO). It is estimated that 3M's benefit plans reflect
approximately $100 million of restructuring related long-term liabilities that
have not yet been paid out as of December 31, 2002.
Selected information related to these charges follows.
- ------------------------------------------------------------------------
Employee
Severance
and Accelerated
(Millions) Benefits Depreciation Other Total
- ------------------------------------------------------------------------
Charges
Year 2001 charges $472 $ 80 $ 17 $569
Year 2002 charges 111 47 44 202
- ------------------------------------------------------------------------
Total charges $583 $127 $61 $771
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Current liability at
December 31, 2000 $ -- $ -- $ --
- ------------------------------------------------------------------------
2001 Charges 472 80 17 569
2001 Cash payments (155) (4) (159)
2001 Non-cash and long-term
portion of liability (132) (80) -- (212)
- ------------------------------------------------------------------------
Current liability at
December 31, 2001 $185 $13 $198
- ------------------------------------------------------------------------
2002 Charges 111 47 44 202
2002 Cash payments (267) (39) (306)
2002 Reclassification from
long-term portion of liability 47 -- 47
2002 Non-cash and long-term
portion of liability (46) (47) -- (93)
- ------------------------------------------------------------------------
Current liability at
December 31, 2002 $ 30 $ 18 $ 48
- ------------------------------------------------------------------------
27
Accounting Pronouncements:
Financial Accounting Standards Board (FASB) Statement No. 142, "Goodwill and
Other Intangible Assets," (SFAS No. 142) was adopted by the company effective
January 1, 2002. Goodwill is subject to an impairment test at least annually.
The company's formal annual review of all goodwill in 2002 indicated that no
impairment existed. Indefinite-lived intangible asset impairments were not
material. Additional information regarding accounting pronouncements of the
FASB, including SFAS No. 142, is included in Note 1 to the Consolidated
Financial Statements.
PERFORMANCE BY BUSINESS SEGMENT
Disclosures relating to 3M's business segments are provided in this Annual
Report on Form 10-K, Item 1, Business Segments. Financial information and
other disclosures, including discussion of non-recurring items, are provided in
the Notes to the Consolidated Financial Statements. Non-recurring items in
2001 (that were not recorded in Corporate and Unallocated) included
acquisition-related costs totaling $23 million ($10 million recorded in Health
Care; $7 million in Transportation, Graphics and Safety; and $6 million in
Electro and Communications).
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
2000 and 2001, with no impact on operating income. This reclassification
resulted in a reduction in both advertising expense and net sales for these
years. These reclassifications were reflected in the company's Consumer and
Office segment.
Effective July 1, 2002, the company also reclassified net sales and operating
income for the realignment of certain businesses from the Health Care segment
to the Consumer and Office segment. This alignment will best utilize 3M's
consumer and key account expertise to strengthen the position of certain brands
in the marketplace. These businesses had net sales of $118 million and
operating income of $7 million for total year 2001. This realignment had no
impact on total company net sales or operating income.
Transportation, Graphics and Safety Markets (23 percent of consolidated sales):
This market provides products for transportation safety, commercial graphics,
respiratory protection, optical display, automotive and personal safety.
Sales in 2002 totaled $3.840 billion, an increase of 8.9 percent from 2001.
Sales volumes were up 9.5 percent and pricing decreased six-tenths of a
percent. Operating income increased to $915 million, up nearly 32 percent on a
reported basis (up about 30 percent excluding non-recurring items in 2001). The
growth in both sales and operating income were driven primarily by optical film
products. In addition, the occupational health and automotive products also
contributed to the sales growth and operating income improvement. In December
2002, 3M completed the acquisition of Corning Precision Lens, Inc., a
manufacturer of lens systems for projection televisions. This acquisition will
add to the optical product offerings and will operate under the name 3M
Precision Optics, Inc. This business had 2002 net sales of approximately $270
million, but since this business was not acquired by 3M until December 2002,
there was minimal impact on 2002 sales and operating income of the
Transportation, Graphics and Safety Markets.
Health Care Markets (22 percent of consolidated sales):
This market provides innovative products that improve people's health and well-
being, including dental, medical supplies, pharmaceuticals, and health
information systems. Sales grew to $3.560 billion, an increase of $259
million, or 7.9 percent, from 2001. Sales volumes were up 6.9 percent and
pricing increased eight-tenths of one percent. Volume and price both were
negatively impacted by generic competition for 3M's branded Tambocor brand
pharmaceutical product. Translation had a positive two-tenths of a percent
impact on Health Care Market sales in 2002. Operating income increased to
$900 million, up 19.5 percent on a reported basis (up about 18 percent
excluding non-recurring items in 2001). 3M's medical supplies, dental
and pharmaceutical products led the sales and operating income growth.
In December 2002, 3M acquired the remaining 43 percent outstanding shares
of 3M Inter-Unitek GmbH (parent company of 3M ESPE Dental AG). Since
these results have been fully consolidated since 2001 (when 3M acquired
57 percent of this business), this additional acquisition of the remaining
28
shares had no impact on 2002 sales or operating income of the Health Care
Markets segment.
In the pharmaceutical business, an agreement was reached with Eli Lilly and
Company in September of 2001 to collaborate on resiquimod, an investigational
compound for the treatment of genital herpes. 3M received $100 million in the
fourth quarter of 2001 from Lilly in consideration for research and
development efforts. Revenue is recognized on a pro-rata basis over the
service period. 3M recognized $43 million of revenue relating to this
agreement in 2002 and $7 million of revenue in 2001. On February 24, 2003, 3M
jointly announced with Lilly suspension of clinical trials of resiquimod
because preliminary data from recently completed Phase III trials suggested
the dosing of resiquimod used in the studies would not achieve adequate
efficacy. The data did not indicate any safety concerns with the drug. 3M and
Lilly are working to determine whether to conduct additional clinical trials
on resiquimod for genital herpes. Meanwhile, the broader family of Immune
Response Modifiers (IRMs) continues to progress. On March 3, 2003, 3M
announced positive clinical results in pivotal Phase III studies of Aldara
brand (imiquimod) Cream 5%, an immune response modifier (IRM), for multiple
actinic keratoses (AK) and superficial basal cell carcinoma (sBCC). These
potentially serious skin conditions are a direct result of cumulative sun
exposure. With these Phase III results on Aldara, 3M Pharmaceuticals is on
schedule for mid-year 2003 FDA submissions of the supplemental new drug
applications.
Industrial Markets (20 percent of consolidated sales):
This market provides tapes, coated and nonwoven abrasives, and specialty
adhesives. Sales totaled $3.225 billion, an increase of eight-tenths of one
percent. Volume decreased 0.3 percent, reflecting continuing weakness in most
manufacturing sectors of the economy. Pricing increased 1.5 percent in 2002 and
translation negatively impacted sales by four-tenths of one percent. Operating
income increased to $563 million, an increase of about 8.5 percent, due to
effective cost control and increased efficiencies. Automotive aftermarket,
engineered adhesives, and industrial tape products all showed good sales growth
and operating income improvement. Coated abrasives and 3M's packaging systems
products were hardest hit by the weakness in the manufacturing sector of the
economy. During the third quarter of 2002, 3M finalized the acquisition of
certain assets and liabilities of Emtech Emulsion Technologies, Inc. and Emtech
Manufacturing Corporation. Acquisitions did not have a significant impact on
2002 sales for this segment (less than 1 percent), and did not materially
impact operating income.
Consumer and Office Markets (17 percent of consolidated sales):
The Consumer and Office segment serves markets that include consumer, office,
education, foodservice and other important markets. Sales in 2002 decreased
nine-tenths of one percent to $2.792 billion. Volumes decreased 1.6 percent in
2002. The decrease in volume reflected continued office worker lay-offs and
inventory contraction in the retail channel affecting office supplies.
Increased pricing had a positive two-tenths of one percent impact, and
translation increased sales by five-tenths of one percent. Operating income
increased to $514 million, up more than 13 percent for the year. Construction
and home improvement products posted strong sales growth and operating income
improvement for the year. 3M's home care and office supply products also
posted strong operating income improvement. Six Sigma and costs savings from
other 3M initiatives drove the operating income improvement.
Electro and Communications Markets (12 percent of consolidated sales):
This segment supplies connecting, splicing, insulating and protective products
for the electronics, communications and electrical industries. Sales in 2002
totaled $1.914 billion, down 11.9 percent from the prior year. Volumes were
down 11.3 percent in 2002. This decrease in volumes reflected overall softness
in the telecom markets. Pricing decreased sales by eight-tenths of one
percent, and translation increased sales by two-tenths of one percent.
Operating income increased to $265 million, up about 21.5 percent on a reported
basis (up about 18 percent excluding non-recurring items in 2001). Operating
income growth was broad-based, except for weakness in the Telecom markets.
29
Specialty Material Markets (6 percent of consolidated sales):
This segment provides high-value materials for demanding applications in
chemical processing, automotive, electronics, telecommunications and other
industries. Sales totaled $953 million in 2002, a decrease of 6.8 percent from
2001, primarily due to the phase-out of perfluorooctanyl chemistry used to
produce repellents and surfactant products. In addition, weaker sales in
electronics end-markets contributed to the decrease in sales. Volume decreased
7.7 percent in 2002. Pricing changes did not impact 2002 sales, and
translation increased sales by nine-tenths of one percent. Products in 3M's
industrial minerals and Dyneon operations both experienced improvements in
sales growth and operating income for 2002. Operating income totaled $136
million, down nearly 4 percent. The decrease in operating income was mainly the
result of the previously-mentioned phase out of perfluorooctanyl chemistry.
This phase out was announced in May 2000, and substantially implemented in that
year; additional steps were taken in 2001 and 2002. For related developments,
refer to the "Environmental Matters" section in Part I, Item 3, Legal
Proceedings.
Information related to 3M's business segments is presented in the table that
follows. Additional information is contained in Note 12 to the Consolidated
Financial Statements.
- ---------------------------------------------------------------------------
Business Segment Information Depr. Capital
Net Operating and Expendi-
(Millions) Sales Income Assets** Amort. tures
- ---------------------------------------------------------------------------
Transportation, 2002 $ 3,840 $ 915 $ 3,526 $ 212 $ 161
Graphics and Safety 2001 3,526 695 2,621 238 208
2000 3,518 783 2,741 186 239
- ---------------------------------------------------------------------------
Health Care 2002 3,560 900 2,409 171 183
2001 3,301 753 2,190 187 171
2000 3,007 667 1,929 175 179
- ---------------------------------------------------------------------------
Industrial 2002 3,225 563 2,155 154 144
2001 3,199 518 2,134 185 191
2000 3,525 641 2,392 213 214
- ---------------------------------------------------------------------------
Consumer and Office 2002 2,792 514 1,519 118 100
2001 2,817 454 1,588 127 114
2000 2,951 442 1,807 114 144
- ---------------------------------------------------------------------------
Electro and 2002 1,914 265 1,670 139 80
Communications 2001 2,171 218 1,807 157 132
2000 2,467 404 1,961 158 208
- ---------------------------------------------------------------------------
Specialty Material 2002 953 136 1,221 94 87
2001 1,022 141 1,208 97 136
2000 1,197 57 1,230 144 131
- ---------------------------------------------------------------------------
Corporate and 2002 48 (247) 2,829 66 8
Unallocated* 2001 18 (506) 3,058 98 28
2000 34 64 2,462 35 --
- ---------------------------------------------------------------------------
Total Company 2002 $16,332 $3,046 $15,329 $ 954 $ 763
2001 16,054 2,273 14,606 1,089 980
2000 16,699 3,058 14,522 1,025 1,115
- ---------------------------------------------------------------------------
*Corporate and Unallocated operating income principally includes corporate
investment gains and losses, certain derivative gains and losses, insurance-
related gains and losses, certain litigation expenses, restructuring charges
and other miscellaneous items. Because this category includes a variety of
miscellaneous items, it is subject to fluctuation on a quarterly and annual
basis.
**Segment assets primarily include accounts receivable; inventory; property,
plant and equipment - net; goodwill and intangible assets; and other
miscellaneous assets. The increase in 2002 assets for Transportation, Graphics
and Safety primarily related to the Corning Precision Lens, Inc. acquisition
in December 2002. Assets included in Corporate and Unallocated principally
are cash and cash equivalents; insurance receivables; deferred income taxes;
certain investments and other assets; and certain unallocated property, plant
and equipment.
30
NEW BUSINESS SEGMENTS REPORTING EFFECTIVE JANUARY 1, 2003:
In September 2002, 3M announced it would strategically realign its organization
for faster growth and a closer focus on markets and customers. This
realignment resulted in seven new reportable business segments compared to the
current structure of six reportable business segments. These structural changes
were driven by 3M's strategic planning process and represent an important step
toward access to its larger and faster-growing markets. Executive vice
president appointments were effective October 1, 2002, but a three-month
transition period was provided to realign the existing organization to the new
structure. Internal management reporting for the new reportable business
segments commenced January 1, 2003.
The new reportable segments are Health Care; Industrial; Consumer and Office;
Display and Graphics; Electro and Communications; Safety, Security and
Protection Services; and Transportation. The Health Care, and Electro and
Communications segments remained largely intact. Specialty Materials was
realigned to other segments. A description of each new reportable business
segment follows.
The Health Care segment serves markets worldwide including medical, surgical,
pharmaceutical, dental, health information systems and other markets. Products
provided to these markets include medical and pharmaceutical products, drug
delivery systems, dental products, health information systems, and personal
care and related products.
The Industrial segment serves a broad range of industrial markets - from
aerospace and plastics to metalworking and packaging. Products include
abrasives, engineered adhesives, industrial tape, packaging systems,
superabrasives and microfinishing systems, surface conditioning products,
Dyneon brand materials, performance materials, specialty materials, and
filtration products.
The Consumer and Office segment serves markets that include consumer, office,
education, foodservice and other important markets. Products in this segment
include office supply products, stationery products, construction and home
improvement products, protective material products, home care, and visual
systems products.
The Display and Graphics segment serves markets that include electronic
display, touch screen, commercial graphics, traffic control materials and other
major markets. This segment includes products related to traffic control
materials, optical systems, commercial graphics and specialty film and media
products.
The Electro and Communications segment serves the electronic and
telecommunications markets with products that speed the delivery of information
and ideas, while also reducing costs. This segment also serves the electrical
power market. Products include electronic and interconnect solutions,
microinterconnect systems, telecommunication products and electrical products.
The Safety, Security and Protection Services segment strives to increase the
safety, security and productivity of workers, facilities and systems around the
world. This includes products related to occupational health and safety,
commercial care, safety and security, industrial mineral, food services trade,
consumer safety and light management, and corrosion protection products.
The Transportation segment serves automotive manufacturers, automotive body
shops, the aerospace and marine industries, and other segments of the
transportation market worldwide. This segment includes products for the
automotive aftermarket, automotive OEM market, aerospace and aircraft
maintenance, marine trades, and commercial vehicles.
Proforma results for this new organizational structure effective January 1,
2003 follow. The company believes this information will assist shareholders in
their understanding of the company and how it will operate going forward.
31
- ----------------------------------------------------------------------------
Supplemental Proforma Business Segment Information
Based on Segment Structure Effective January 1, 2003
Depr. Capital
Net Operating and Expendi-
(Millions) Sales Income Assets** Amort. tures
- ----------------------------------------------------------------------------
Health Care 2002 $ 3,560 $ 900 $ 2,409 $ 171 $ 183
2001 3,301 753 2,190 187 171
2000 3,007 667 1,929 175 179
- ----------------------------------------------------------------------------
Industrial 2002 3,147 487 2,685 196 158
2001 3,163 457 2,660 199 201
2000 3,548 641 2,904 191 244
- ----------------------------------------------------------------------------
Consumer and Office 2002 2,444 448 1,354 113 90
2001 2,523 410 1,429 133 123
2000 2,753 437 1,695 128 154
- ----------------------------------------------------------------------------
Display and Graphics 2002 2,228 534 2,476 135 84
2001 1,997 372 1,619 169 117
2000 1,967 474 1,684 158 165
- ----------------------------------------------------------------------------
Electro and 2002 1,831 253 1,633 110 77
Communications 2001 2,107 215 1,768 136 148
2000 2,398 399 1,916 120 204
- ----------------------------------------------------------------------------
Safety, Security 2002 1,686 338 1,097 97 105
and Protection 2001 1,639 302 1,054 104 122
Services 2000 1,615 265 1,021 99 75
- ----------------------------------------------------------------------------
Transportation 2002 1,388 333 846 66 58
2001 1,306 270 828 63 70
2000 1,377 279 911 63 94
- ----------------------------------------------------------------------------
Corporate and 2002 48 (247) 2,829 66 8
Unallocated* 2001 18 (506) 3,058 98 28
2000 34 (104) 2,462 91 --
- ----------------------------------------------------------------------------
Total Company 2002 $16,332 $3,046 $15,329 $ 954 $ 763
2001 16,054 2,273 14,606 1,089 980
2000 16,699 3,058 14,522 1,025 1,115
- ----------------------------------------------------------------------------
*Corporate and Unallocated operating income principally includes corporate
investment gains and losses, certain derivative gains and losses, insurance-
related gains and losses, certain litigation expenses, restructuring charges
and other miscellaneous items. Because this category includes a variety of
miscellaneous items, it is subject to fluctuation on a quarterly and annual
basis.
**Segment assets primarily include accounts receivable; inventory; property,
plant and equipment - net; goodwill and intangible assets; and other
miscellaneous assets. The increase in 2002 assets for Display and Graphics
primarily related to the Corning Precision Lens, Inc. acquisition in December
2002. Assets included in Corporate and Unallocated principally are cash and
cash equivalents; insurance receivables; deferred income taxes; certain
investments and other assets; and certain unallocated property, plant and
equipment.
Transactions among reportable segments are recorded at cost. 3M is an
integrated enterprise characterized by substantial intersegment cooperation,
cost allocations and inventory transfers. Therefore, management does not
represent that these segments, if operated independently, would report the
operating income and other financial information shown. The allocations
resulting from the shared utilization of assets are not necessarily indicative
of the underlying activity for segment assets, depreciation and amortization,
and capital expenditures.
Operating income in 2002 included non-recurring charges of $202 million related
to the restructuring plan (recorded in Corporate and Unallocated).
Depreciation and amortization of $954 million included accelerated depreciation
(shortened lives) of $47 million related to the restructuring (recorded in
Corporate and Unallocated).
Operating income in 2001 included non-recurring charges of $504 million. Non-
recurring charges, principally related to the company's restructuring plan,
32
totaled $569 million (recorded in Corporate and Unallocated). Acquisition-
related costs totaled $23 million ($10 million recorded in Health Care; $7
million in Display and Graphics; and $6 million in Electro and Communications).
Additional items recorded in Corporate and Unallocated included a reversal of a
1999 litigation accrual of $73 million, and a gain of $15 million related to
the net impact of the sale and write-down of available-for-sale equity
securities. Depreciation and amortization of $1.089 billion included
accelerated depreciation (shortened lives) of $80 million related to the
restructuring (recorded in Corporate and Unallocated).
Operating income in 2000 included non-recurring net losses of $23 million. Non-
recurring costs included $168 million related to the company's phase-out of
perfluorooctanyl-based chemistry products (recorded in Corporate and
Unallocated). This $168 million included $56 million of accelerated
depreciation (included in Corporate and Unallocated depreciation and
amortization), $48 million of impairment losses, and severance and other costs.
Other non-recurring costs included a $20 million write-down of corporate and
unallocated assets, and $20 million of other non-recurring expenses ($13
million related to acquisitions in the Electro and Communications segment).
Non-recurring operating income gains in 2000 of $135 million were largely
related to corporate and unallocated asset dispositions, principally the sale
of available-for-sale equity securities. Operating income in 2000 also included
a $50 million gain from the termination of a product distribution agreement in
the Health Care segment.
PERFORMANCE BY GEOGRAPHIC AREA
Financial information, including discussion of non-recurring items, related to
3M operations in various geographic areas is provided in Note 13 to the
Consolidated Financial Statements. Some of the products or components sold by
3M's international countries to third parties are exported back to the United
States and other parts of the world. Thus, the net sales growth by geography
may not be indicative of end-user consumption in the local country. Non-
recurring pre-tax losses of $202 million in 2002 and $504 million in 2001,
primarily related to the restructuring, are included in Eliminations and Other
(not assigned to a specific geographic area).
United States (45 percent of consolidated sales):
Sales in the United States totaled $7.426 billion, down 1.3 percent from 2001.
U.S. core volume declined 1.6 percent. Operating income was up 14.8 percent.
Weak overall sales in Electro and Communications, Specialty Material and
Industrial segments were partially offset by good growth in the Health Care and
Consumer and Office segments.
Europe and Middle East (25 percent of consolidated sales):
Sales in Europe and the Middle East totaled $4.035 billion, up 1.9 percent from
2001. Volume decreased 3.5 percent and selling prices were up two-tenths of one
percent. Currency translation increased sales by 5.2 percent. The significant
downturn in the telecom industry negatively impacted Europe's sales. However,
higher growth in the Health Care segment provided some offset to the telecom
impact. Despite the decrease in volumes, 2002 operating income increased by 20
percent. Operating income was 17.0 percent of sales, compared with 14.4
percent of sales in 2001.
Asia Pacific (21 percent of consolidated sales):
Sales in Asia Pacific totaled $3.431 billion, up 12.8 percent from 2001.
Volume in the Asia Pacific area increased 14.4 percent, driven by the
Transportation, Graphics and Safety, Health Care and Industrial segments.
Selling prices decreased 1.7 percent, while currency translation increased
sales by one-tenth of one percent. Operating income was 29.4 percent of sales,
up from 26.5 percent in 2001. In Japan, home of 3M's largest international
company, volume increased 7.5 percent. Volume in the remainder of the Asia
Pacific region increased about 21 percent.
Latin America, Canada and Africa (9 percent of consolidated sales):
Sales in Latin America, Canada and Africa combined totaled $1.392 billion, down
6.8 percent from 2001. In Latin America, local-currency sales increased 5.3
percent. Currency reduced Latin America sales by 16.4 percent. Economic and
political instability negatively impacted sales in many parts of Latin America
during 2002. In Canada, volume increased 4.6 percent. Selling prices
increased nine-tenths of one percent, while translation decreased 1.1 percent.
Operating income for Latin America, Canada and Africa was 28.0 percent of
sales, up from 24.1 percent in 2001.
33
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity at December 31, 2002, remains
strong. Various assets and liabilities, including cash and short-term debt, can
fluctuate significantly from month to month depending on short-term liquidity
needs. Working capital (defined as current assets minus current liabilities)
totaled $1.602 billion at December 31, 2002, decreasing $185 million from year-
end 2001.
The accounts receivable turnover index (defined as quarterly net sales
multiplied by 4 divided by ending net accounts receivable) totaled 6.55 at
December 31, 2002, an improvement from 6.22 at year-end 2001. Receivables
increased $45 million compared with year-end 2001, with currency translation
increasing the accounts receivable balance by $147 million (due to the weaker
U.S. dollar). The inventory turnover index (defined as quarterly factory cost
excluding non-recurring amounts multiplied by 4 divided by ending inventory)
was 4.17 at December 31, 2002, an improvement from 3.76 at year-end 2001.
Inventories declined $160 million compared with year-end 2001, despite currency
translation increasing the inventory balance by $88 million compared with
December 31, 2001.
Cash flows provided by operating activities totaled $2.992 billion in 2002,
$3.078 billion in 2001 and $2.326 billion in 2000. Cash flows from operating
activities can fluctuate significantly from period to period. Pension funding
decisions, tax timing differences and other items can significantly impact
cash flows. In 2002, 3M funded certain employee pension plans by nearly $1.1
billion, primarily in the third and fourth quarters of 2002 (discussed in more
detail later), resulting in a decrease of operating cash flows. Cash flow
benefits resulted from increased profitability, working capital improvements
and tax timing differences. In 2001, working capital reductions drove the
increase. As discussed in the "Performance by Business Segment" section of
this report, 3M received $100 million from Eli Lilly and Company in the fourth
quarter of 2001 relating to a pharmaceutical agreement. In 2002, 3M made $306
million of payments under the restructuring plan, compared with $159 million in
2001. In 2002, 2001 and 2000, 3M's insurance recoveries, net of claims paid,
related to the breast implant litigation totaled $51 million, $101 million and
$49 million, respectively. 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 I, Item 3, Legal
Proceedings, of this Annual Report on Form 10-K.
Globally, 3M's pension plan assets have declined due to recent equity market
weakness while pension liabilities and benefit payments have continued to
grow. 3M's pension plan assets were below 3M's accumulated benefit obligation
(ABO) at its most recent plan measurement dates for certain plans. Accounting
rules require that, if ABO exceeds the fair value of pension plan assets, the
employer must recognize a liability that is at least equal to the unfunded
ABO. In the fourth quarter of 2002, 3M recorded a minimum pension liability
adjustment that impacted other comprehensive income by $1.056 billion (net of
tax). Other comprehensive income captures certain items excluded from net
income, such as changes in cumulative translation, unrealized gains or losses
related to available-for-sale equity securities, as well as additional minimum
pension liabilities not yet recognized in the Consolidated Statement of Income
as part of net pension cost. Other balance sheet accounts impacted by this
included deferred tax assets (increase of $666 million), unfunded pension
assets (decrease of $1.185 billion), pension and other liabilities (increase
of $641 million), and an intangible asset related to unrecognized prior
service costs (increase of $104 million). In the third quarter of 2002, the
company's U.S. pension contribution of $789 million resulted in an increase in
prepaid pension assets and an increase of approximately $300 million in
deferred income tax liabilities. Future pension contributions will depend on
market conditions. In looking at a number of different scenarios, 3M is
confident its strong cash flow and balance sheet will allow it to fund future
pension needs without compromising growth opportunities.
Cash used in investing activities totaled $1.927 billion in 2002,
compared with $1.050 billion in 2001 and $1.373 billion in 2000.
Purchases of property, plant and equipment totaled $763 million in
2002, $980 million in 2001, and $1.115 billion in 2000. These investments
are helping to meet product demand and increase manufacturing efficiency.
3M expects to spend approximately $900 million in 2003 on purchases of
34
property, plant and equipment. Proceeds from the sale of property, plant
and equipment totaled $82 million, down from approximately $100 million in
both 2001 and 2000.
Cash used for acquisitions of businesses totaled $1.258 billion in 2002, $218
million in 2001 and $472 million in 2000. 3M completed two significant
transactions in 2002. First, 3M purchased Corning Precision Lens, Inc. for
approximately $850 million, or approximately $680 million after considering the
net present value of the joint election tax benefit under Section 338(h)(10),
which allows goodwill to be fully deductible for tax purposes over a period of
15 years. Second, 3M purchased the 43 percent minority shares of 3M Inter-
Unitek GmbH for approximately $304 million. The company also entered into
seven other business combinations in 2002 for a total of $104 million in cash
(net of cash acquired) and $35 million of 3M common stock. Refer to Note 3 in
the Consolidated Financial Statements for additional information on business
combinations.
There were three significant business combinations in 2001. 3M acquired
MicroTouch Systems Inc., a touch screen manufacturer, for $158 million in cash,
net of cash acquired. 3M also acquired Robinson Nugent, Inc., a
telecommunications supplier, in exchange for 1,124,135 shares of 3M common
stock. The company also combined its German dental business (3M Inter-Unitek
GmbH, an existing 3M subsidiary) with ESPE Dental AG, a dental products
manufacturer. 3M Inter-Unitek GmbH acquired 100 percent of the outstanding
shares of ESPE Dental AG in exchange for 43 percent ownership in 3M Inter-
Unitek GmbH and $25 million, net of cash acquired (see previous discussion
concerning the purchase of the remaining 3M Inter-Unitek GmbH minority shares
in 2002). Acquisition activity in 2001 also included the purchase, for less
than $50 million, of five smaller companies that had combined annual net sales
of less than $50 million in total.
Acquisitions in 2000 totaled $472 million in cash (net of cash acquired), plus
128,994 shares of 3M common stock. This included the purchase of 91 percent
(subsequently increased to 99 percent) of Quante AG (a telecommunications
supplier); the purchase of the multi-layer integrated circuit packaging line of
W.L. Gore and Associates; and the acquisition of seven smaller businesses.
These seven smaller businesses had a combined purchase price of less than $125
million and combined annual net sales of less than $75 million.
The company is actively considering additional acquisitions. In January 2003,
3M entered into two additional business combinations, neither of which impacted
2002 operating results or the balance sheet as of December 31, 2002. 3M
purchased an additional 25 percent share of Sumitomo 3M Limited, a Japanese
company, from NEC Corporation for approximately $375 million. Prior to this
purchase, 3M controlled and owned 50 percent of Sumitomo 3M Limited and fully
consolidated both Sumitomo 3M Limited's balance sheet and results of
operations, with a provision for the minority interest that did not have
participating rights. In a smaller acquisition, 3M acquired 100 percent of the
common shares of Solvay Fluoropolymers, which has manufacturing facilities
located in Decatur, Alabama. Although purchase price allocations have not been
finalized, 3M expects no in-process research and development charges resulting
from these acquisitions.
Purchases of investments totaled $7 million in 2002 and $12 million in both
2001 and 2000. These purchases include additional survivor benefit insurance
and equity investments.
Total debt at December 31, 2002, was $3.377 billion, up from $2.893 billion at
year-end 2001. Total debt was 36 percent of total capital, compared with 32
percent at year-end 2001. The company financed the fourth quarter 2002 Corning
Precision Lens, Inc. acquisition through a combination of operating cash flows
and other financing. Other fourth quarter 2002 events that impacted the debt
to capital ratio included the purchase by 3M of the remaining 43 percent
minority interest in 3M Inter-Unitek GmbH for cash of $304 million, and the
equity reduction from the minimum pension liability adjustment effect on other
comprehensive income of approximately $1.1 billion. For these reasons, 3M's
debt to capital for year-end 2002 totaled 36 percent and may stay close to
that level for the next quarter or two. The debt to capital ratio is expected
to return to the 30 to 35 percent range shortly thereafter.
35
In 2002, the cash flow decrease in net short-term debt of $204 million includes
the portion of short-term debt with original maturities of three months or
less. The repayment of debt of $497 million primarily related to the repayment
of commercial paper having original maturities greater than three months. The
proceeds from debt of $1.146 billion included $550 million related to issuance
of convertible debt in 2002 (discussed in more detail later), $400 million
related to a 2002 debt issuance under the medium-term notes program, and the
balance was largely comprised of commercial paper having original maturities
greater than three months. In 2001, both repayment and proceeds from debt
amounts include large amounts related to commercial paper having original
maturities greater than three months.
On November 15, 2002, 3M sold $639 Million in aggregate face amount of 30-year
zero coupon senior notes (the "Convertible Notes") that are convertible into
shares of 3M common stock. The gross proceeds from the offering, to be used
for general corporate purposes, were $550 million ($540 million net of
issuance costs). The terms of the Convertible Notes include a yield to
maturity of .50 percent and an initial conversion premium of 40 percent over
the $130.00 closing price of 3M common stock on November 14, 2002. If certain
conditions for conversion (relating to the closing common stock prices of 3M
exceeding certain thresholds for specified periods) are met, holders may
convert each of the 30-year zero-coupon senior notes into 4.7301 shares of 3M
common stock in any calendar quarter commencing after March 31, 2003. If the
conditions for conversion are met, and 3M elects not to settle in cash, the
30-year zero-coupon senior notes will be convertible in the aggregate into
approximately 3.0 million shares of 3M common stock. 3M may redeem the 30-year
zero-coupon senior notes at any time in whole or in part, after five years at
the greater of the accreted conversion price or the current market price.
Holders of the 30-year zero-coupon senior notes have the option to require 3M
to purchase their notes at accreted value in years three, five, 10, 15, 20 and
25. 3M may choose to pay the redemption purchase price in cash and/or common
stock. Debt issuance costs are amortized on a straight-line basis over a
three-year period beginning in November 2002. There was no impact on 3M's
2002 diluted earnings per share, as the conversion rights commence after March
31, 2003. On February 14, 2003, 3M registered these Convertible Notes in a
registration statement filed with the Securities and Exchange Commission.
In December 2000, the company issued approximately $350 million of debt
securities, remarketable annually (with a final maturity date of December
2010), which is classified as short-term debt. 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. 3M plans to use the net
proceeds from future issuances of debt securities under these registrations for
general corporate purposes, including the repayment of debt or the financing of
possible acquisitions. As of December 31, 2002, $950 million of medium-term
notes had been issued under the medium-term note program and another $56
million of debt securities had been issued directly from the shelf,
aggregating $1.006 billion of outstanding debt securities issued under the
shelf.
The company's liquidity position remains strong. Primary short-term liquidity
needs are provided through U.S. commercial paper and euro commercial paper
issuances. At year-end 2002, outstanding total commercial paper issued
totaled $494 million and averaged approximately $455 million during 2002.
Medium-term note shelf borrowing capacity totaled $450 million at year-end
2002. Credit support for outstanding commercial paper is provided by a $565
million, 364-day credit agreement among a group of primary relationship banks.
The facility provides up to $65 million in letters of credit ($64 million of
which was outstanding at December 31, 2002). Committed credit facilities
of $91 million are in place across several international subsidiary
locations. The company also has uncommitted lines of credit totaling $250
36
million. The company expects to renew the committed lines of credit
facilities in 2003. The company believes it is unlikely that its access to
the commercial paper market will be restricted. Cash and cash equivalents
and certain other current assets could provide additional liquidity to meet
near term obligations, if necessary.
At year-end 2002, certain debt agreements ($565 million of short-term lines of
credit, $350 million of dealer remarketable securities, and the $271 million of
ESOP debt) had ratings triggers (BBB-/Baa3 or lower) that would require
repayment of debt. The company currently has an AA/Aa1 rating.
A summary of the company's significant contractual obligations follows.
Certain unconditional purchase obligations relate to take or pay contracts with
terms in excess of one year, in which 3M has typically guaranteed payment to
ensure availability of products or services that are sold to customers. The
company expects to receive consideration (products or services) for a majority
of these unconditional purchase obligations. Other contractual obligations are
not significant. The ESOP debt guarantee is recorded as a component of long-
term debt.
- -------------------------------------------------------------------------------
Contractual Obligations
Payments due by year
After
(Millions) Total 2003 2004 2005 2006 2007 2007
- -------------------------------------------------------------------------------
Long-term debt
(including current portion) $2,493 $353 $385 $437 $ 39 $ 40 $1,239
Operating leases 283 71 52 34 25 19 82
Capital leases 111 4 4 4 4 4 91
Unconditional purchase
obligations 153 66 46 27 4 3 7
- -------------------------------------------------------------------------------
Total contractual cash
obligations $3,040 $494 $487 $502 $ 72 $ 66 $1,419
- -------------------------------------------------------------------------------
3M's guarantees of loans with third parties, indemnification contracts, and
other guarantees are estimated at approximately $25 million. 3M's accrued
product warranty liability is also estimated at approximately $25 million. 3M
does not consider these amounts to be significant.
Repurchases of 3M common stock totaled $942 million in 2002, compared with
$1.322 billion in 2001 and $814 million in 2000. Repurchases were made to
support the company's management stock option plan, its general employees'
stock purchase plan, and for other corporate purposes. In November 2001, the
Board of Directors authorized the repurchase of up to $2.5 billion of the
company's common stock. This share repurchase authorization is effective from
January 1, 2002, through December 31, 2003. In 2002, the company purchased
approximately 7.9 million shares for $942 million.
The reduction in annual weighted average diluted shares outstanding (including
the effects of repurchases, issuances and dilution) resulted in a benefit of 6
cents per diluted share in 2002 and 8 cents per diluted share in 2000. There
was no impact in 2001.
Cash dividends paid to stockholders in 2002 totaled $968 million, or $2.48 per
share. 3M has paid dividends since 1916. In February 2003, the Board of
Directors increased the quarterly dividend on 3M common stock to 66 cents per
share, equivalent to an annual dividend of $2.64 per share. This marks the 45th
consecutive year of dividend increases.
FINANCIAL INSTRUMENTS
The company enters into contractual derivative arrangements in the ordinary
course of business to manage foreign currency exposure, interest rate risks and
commodity price risks. A financial risk management committee, composed of
senior management, provides oversight for risk management and derivative
activities. This committee determines the company's financial risk policies
and objectives, and provides guidelines for derivative instrument utilization.
This committee also establishes procedures for control and valuation, risk
analysis, counterparty credit approval, and ongoing monitoring and reporting.
37
The company enters into foreign exchange forward contracts, options and swaps
to hedge against the effect of exchange rate fluctuations on cash flows
denominated in foreign currencies and certain intercompany financing
transactions. The company manages interest rate risks using a mix of fixed and
floating rate debt. To help manage borrowing costs, the company may enter into
interest rate swaps. Under these arrangements, the company agrees to exchange,
at specified intervals, the difference between fixed and floating interest
amounts calculated by reference to an agreed-upon notional principal amount.
The company manages commodity price risks through negotiated supply contracts,
price protection swaps and forward physical contracts.
A variance/co-variance statistical modeling technique was used to test the
company's exposure to changes in currency and interest rates and assess the
risk of loss in after-tax earnings of financial instruments, derivatives and
underlying exposures outstanding at December 31, 2002. The model (third-party
bank dataset) used a 95 percent confidence level over a 12-month time horizon.
Based on this analysis of the company's interest rate risks, possible changes
in interest rates would not adversely impact after-tax earnings by a material
amount ($7 million at December 31, 2002, and $6 million at December 31, 2001).
Based on this analysis of the primary foreign exchange risks, possible changes
in foreign exchange rates could adversely impact after-tax earnings by $40
million ($57 million at December 31, 2001). In 2002, the actual currency
impact did not exceed the value-at-risk after-tax amount of $40 million. This
model analyzed more than 20 different currencies, but does not purport to
represent what actually will be experienced by the company. This model does
not include certain hedge transactions, because the company believes their
inclusion would not materially impact the results.
The company is increasingly striving to more closely align its manufacturing
and sourcing with geographic market sales, which will move costs outside the
United States. This will also help mitigate the effects from currency
fluctuations. In 2001, the company increased the amount and duration of its
foreign currency hedges to help lessen year-over-year impacts and to improve
the predictability of future earnings. However, this hedging program will not
make 3M immune to currency impacts.
Sensitivity analysis was used to assess commodity risks. The technique used
evaluates the effect that changes in the market value of commodities will have
on the company's commodity derivative instruments. At year-end 2002 and 2001,
the potential change in fair value of commodity derivative instruments,
assuming a 10 percent adverse change in the underlying commodity price, was not
material ($1 million after tax at December 31, 2002, and $4 million after tax
at December 31, 2001).
The global exposures related to purchased components and materials are such
that a one percent price change would result in a pre-tax cost or savings of
approximately $40 million per year. Derivative instruments are used to
partially hedge about one percent of this exposure. The global energy exposure
is such that a 10 percent price change would result in a pre-tax cost or
savings of approximately $30 million per year. Derivative instruments are used
to partially hedge about 15 percent of this energy exposure.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the context of Item 7A, market risk refers to the risk of loss arising from
adverse changes in financial and derivative instrument market rates and prices,
such as fluctuations in interest rates and foreign-currency exchange rates. The
company discusses risk management in various places throughout this document,
including discussions in Item 7 concerning Financial Condition and Liquidity,
and Financial Instruments, and in the Notes to Consolidated Financial
Statements (Debt, Derivatives and Other Financial Instruments, and the
Derivatives and Hedging Activities accounting policy). All derivative activity
is governed by written policies, and a value-at-risk analysis is provided for
these derivatives. The company does not have leveraged derivative positions.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
Reference (pages)
Form 10-K
-----------------
Responsibility for Financial Reporting ..................... 39
Report of Independent Accountants .......................... 40
Consolidated Statement of Income for the years ended
December 31, 2002, 2001 and 2000 ......................... 41
Consolidated Balance Sheet at December 31, 2002 and
2001 ..................................................... 42
Consolidated Statement of Changes in Stockholders'
Equity and Comprehensive Income for the years ended
December 31, 2002, 2001 and 2000.......................... 43
Consolidated Statement of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 ......................... 44
Notes to Consolidated Financial Statements ................. 45-73
Note 1. Significant Accounting Policies 45
Note 2. Restructuring Charges 49
Note 3. Acquisitions and Divestitures 51
Note 4. Goodwill and Indefinite-Lived Intangible Assets 54
Note 5. Supplemental Statement of Income Information 56
Note 6. Supplemental Balance Sheet Information 56
Note 7. Supplemental Stockholder's Equity and
Comprehensive Income Information 58
Note 8. Supplemental Cash Flow Information 58
Note 9. Debt 59
Note 10. Derivatives and Other Financial Instruments 60
Note 11. Income Taxes 63
Note 12. Business Segments 65
Note 13. Geographic Areas 67
Note 14. Pension and Postretirement Benefit Plans 67
Note 15. Employee Savings and Stock Ownership Plans 69
Note 16. General Employee's Stock Purchase Plan 70
Note 17. Management Stock Ownership Program 70
Note 18. Commitments and Contingencies 72
Note 19. Quarterly Data (Unaudited) 73
39
RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the integrity and objectivity of the financial
information included in this report. The financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Where necessary, the financial statements reflect
estimates based on management judgment.
Management has established and maintains a system of internal accounting and
other controls for the company and its subsidiaries. Management believes that
established accounting procedures and related systems of internal control
provide reasonable assurance that assets are safeguarded, that the books and
records properly reflect all transactions, and that policies and procedures
are implemented by qualified personnel. The company's system of internal
controls is supported by widely communicated written policies, including
business conduct policies, which are designed to require all employees to
maintain high ethical standards in the conduct of company affairs. Internal
auditors continually review the accounting and control systems.
The Audit Committee, composed entirely of outside members of the Board of
Directors, meets regularly with representatives of management, the independent
accountants and the company's internal auditors to monitor the functioning of
the accounting control systems and to review the results of the auditing
activities. The Audit Committee selects the independent accountants for
appointment, subject to shareholder ratification. The independent accountants
have full and free access to the Audit Committee. The independent accountants
conduct an objective, independent audit of the financial statements.
/s/ W. James McNerney, Jr. /s/ Patrick D. Campbell
- ---------------------------- --------------------------
W. James McNerney, Jr. Patrick D. Campbell
Chief Executive Officer Chief Financial Officer
3M Company 3M Company
40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of 3M Company:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the consolidated
financial position of 3M Company and its subsidiaries at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note 1 and Note 4 to the Consolidated Financial Statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets."
/s/ PricewaterhouseCoopers LLP
- ---------------------------------
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 10, 2003
41
CONSOLIDATED STATEMENT OF INCOME
- ---------------------------------------------------------------------------------
3M Company and Subsidiaries
Years ended December 31
(Amounts in millions, except per share amounts) 2002 2001 2000
- ---------------------------------------------------------------------------------
Net sales $16,332 $16,054 $16,699
- ---------------------------------------------------------------------------------
Operating expenses
Cost of sales 8,496 8,749 8,787
Selling, general and administrative expenses 3,720 4,036 3,938
Research, development and related expenses 1,070 1,084 1,101
Other expense (income) -- (88) (185)
- ---------------------------------------------------------------------------------
Total 13,286 13,781 13,641
- ---------------------------------------------------------------------------------
Operating income 3,046 2,273 3,058
- ---------------------------------------------------------------------------------
Interest expense and income
Interest expense 80 124 111
Interest income (39) (37) (27)
- ---------------------------------------------------------------------------------
Total 41 87 84
- ---------------------------------------------------------------------------------
Income before income taxes, minority interest
and cumulative effect of accounting change 3,005 2,186 2,974
Provision for income taxes 966 702 1,025
Minority interest 65 54 92
- ---------------------------------------------------------------------------------
Income before cumulative effect of accounting change 1,974 1,430 1,857
Cumulative effect of accounting change -- -- (75)
- ---------------------------------------------------------------------------------
Net income $ 1,974 $ 1,430 $ 1,782
- ---------------------------------------------------------------------------------
Weighted average common shares outstanding - basic 390.0 394.3 395.7
Earnings per share - basic
Income before cumulative effect of accounting change $ 5.06 $ 3.63 $ 4.69
Cumulative effect of accounting change -- -- (.19)
- ---------------------------------------------------------------------------------
Net income $ 5.06 $ 3.63 $ 4.50
- ---------------------------------------------------------------------------------
Weighted average common shares outstanding - diluted 395.5 399.9 399.9
Earnings per share - diluted
Income before cumulative effect of accounting change $ 4.99 $ 3.58 $ 4.64
Cumulative effect of accounting change -- -- (.19)
- ---------------------------------------------------------------------------------
Net income $ 4.99 $ 3.58 $ 4.45
- ---------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
42
CONSOLIDATED BALANCE SHEET
- ----------------------------------------------------------------------------
3M Company and Subsidiaries
At December 31
(Dollars in millions, except per share amounts) 2002 2001
- ----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 618 $ 616
Accounts receivable - net 2,527 2,482
Inventories 1,931 2,091
Other current assets 983 1,107
- ----------------------------------------------------------------------------
Total current assets 6,059 6,296
Investments 238 275
Property, plant and equipment - net 5,621 5,615
Goodwill 1,898 1,012
Intangible assets 269 238
Other assets 1,244 1,170
- ----------------------------------------------------------------------------
Total assets $15,329 $14,606
- ----------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Short-term debt $ 1,237 $ 1,373
Accounts payable 945 753
Payroll 411 539
Income taxes 518 596
Other current liabilities 1,346 1,248
- ----------------------------------------------------------------------------
Total current liabilities 4,457 4,509
Long-term debt 2,140 1,520
Other liabilities 2,739 2,491
- ----------------------------------------------------------------------------
Total liabilities 9,336 8,520
- ----------------------------------------------------------------------------
Commitments and contingencies (Note 18)
Stockholders' equity
Common stock, par value $.01 per share 5 5
Shares outstanding - 2002: 390,195,681
2001: 391,303,636
Capital in excess of par value 291 291
Retained earnings 12,748 11,914
Treasury stock (4,767) (4,633)
Unearned compensation (258) (286)
Accumulated other comprehensive income (loss) (2,026) (1,205)
- ----------------------------------------------------------------------------
Stockholders' equity - net 5,993 6,086
- ----------------------------------------------------------------------------
Total liabilities and stockholders' equity $15,329 $14,606
- ----------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
43
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------
3M Company and Subsidiaries
Accumulated
Common Other
Stock and Compre-
Capital in Unearned hensive
(Dollars in millions, Excess Retained Treasury Compen- Income
except per share amounts) Total of Par Earnings Stock sation (Loss)
- ------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $6,289 $296 $10,741 $(3,833) $(327) $(588)
- ------------------------------------------------------------------------------------------------
Net income 1,782 1,782
Cumulative translation adjustment - net
of $5 million tax provision (191) (191)
Minimum pension liability adjustment - net
of $37 million tax benefit (28) (28)
Debt and equity securities, unrealized
loss - net of $65 million tax benefit (107) (107)
- --------------------------------------------------
Total comprehensive income 1,456
Dividends paid ($2.32 per share) (918) (918)
Amortization of unearned compensation 24 24
Reacquired stock (9.1 million shares) (814) (814)
Issuances pursuant to stock option
and benefit plans (6.3 million shares) 483 (88) 571
Issuances pursuant to acquisitions
(129 thousand shares) 11 11
- ------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $6,531 $296 $11,517 $(4,065) $(303) $(914)
- ------------------------------------------------------------------------------------------------
Net income 1,430 1,430
Cumulative translation adjustment - net
of $14 million tax provision (267) (267)
Minimum pension liability adjustment - net
of $15 million tax benefit (16) (16)
Debt and equity securities, unrealized
loss - net of $11 million tax benefit (17) (17)
Derivative financial instruments - unrealized
gain - net of $5 million tax provision 9 9
- --------------------------------------------------
Total comprehensive income 1,139
Dividends paid ($2.40 per share) (948) (948)
Amortization of unearned compensation 17 17
Reacquired stock (12.0 million shares) (1,322) (1,322)
Issuances pursuant to stock option
and benefit plans (6.1 million shares) 543 (85) 628
Issuances pursuant to acquisitions, net
of returns of $1 million from escrow
(net 1.1 million shares issued) 126 126
- ------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $6,086 $296 $11,914 $(4,633) $(286) $(1,205)
- ------------------------------------------------------------------------------------------------
Net income 1,974 1,974
Cumulative translation adjustment - net
of $14 million tax benefit 294 294
Minimum pension liability adjustment - net
of $666 million tax benefit (1,056) (1,056)
Debt and equity securities, unrealized
loss - net of $6 million tax benefit (11) (11)
Derivative financial instruments - unrealized
gain - net of $28 million tax benefit (48) (48)
- --------------------------------------------------
Total comprehensive income 1,153
Dividends paid ($2.48 per share) (968) (968)
Amortization of unearned compensation 28 28
Reacquired stock (7.9 million shares) (942) (942)
Issuances pursuant to stock option
and benefit plans (6.8 million shares) 601 (172) 773
Issuances pursuant to acquisitions,
(278 thousand shares) 35 35
- ------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $5,993 $296 $12,748 $(4,767) $(258) $(2,026)
- ------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
44
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------
3M Company and Subsidiaries
Years ended December 31 2002 2001 2000
(Dollars in millions)
- ------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 1,974 $1,430 $1,782
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 954 1,089 1,025
Pension company contributions (1,086) (157) (150)
Deferred income tax provision 579 1 89
Changes in assets and liabilities
Accounts receivable 145 345 (171)
Inventories 279 194 (261)
Other current assets 58 (97) (69)
Other assets - net of amortization (54) 109 (17)
Income taxes payable (11) 211 88
Accounts payable and other current liabilities (33) (62) 65
Other liabilities 113 8 (70)
Other - net 74 7 15
- -------------------------------------------------------------------------------
Net cash provided by operating activities 2,992 3,078 2,326
- -------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of property, plant and equipment (763) (980) (1,115)
Proceeds from sale of property, plant and equipment 82 102 104
Acquisitions of businesses (1,258) (218) (472)
Proceeds from sale of businesses 1 11 1
Purchases of investments (7) (12) (12)
Proceeds from sale of investments 18 47 121
- -------------------------------------------------------------------------------
Net cash used in investing activities (1,927) (1,050) (1,373)
- -------------------------------------------------------------------------------
Cash Flows from Financing Activities
Change in short-term debt - net (204) (20) (236)
Repayment of debt (maturities greater than 90 days) (497) (1,564) (23)
Proceeds from debt (maturities greater than 90 days) 1,146 1,693 495
Purchases of treasury stock (942) (1,322) (814)
Reissuances of treasury stock 522 462 425
Dividends paid to stockholders (968) (948) (918)
Distributions to minority interests (78) (17) (60)
- -------------------------------------------------------------------------------
Net cash used in financing activities (1,021) (1,716) (1,131)
- -------------------------------------------------------------------------------
Effect of exchange rate changes on cash (42) 2 93
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2 314 (85)
Cash and cash equivalents at beginning of year 616 302 387
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 618 $ 616 $ 302
- -------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation: All significant subsidiaries are consolidated. All significant
intercompany transactions are eliminated. As used herein, the term "3M" or
"company" refers to 3M Company and subsidiaries unless the context indicates
otherwise.
Foreign currency translation: Local currencies generally are considered the
functional currencies outside the United States. Assets and liabilities for
operations in local-currency environments are translated at year-end exchange
rates. Income and expense items are translated at average rates of exchange
prevailing during the year. Cumulative translation adjustments are recorded as
a component of accumulated other comprehensive income in stockholders' equity.
Reclassifications: Certain prior period balance sheet amounts have been
reclassified to conform with the current year presentation.
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 2000 and 2001. These adjustments were associated with the company's
Consumer and Office segment.
Use of estimates: The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Cash and cash equivalents: Cash and cash equivalents consist of cash and
temporary investments with maturities of three months or less when purchased.
Investments: Investments primarily include the cash surrender value of life
insurance policies, real estate, venture capital and equity-method investments.
Unrealized gains and losses relating to investments classified as available-
for-sale are recorded as a component of accumulated other comprehensive income
(loss) in stockholders' equity.
Inventories: Inventories are stated at lower of cost or market, with cost
generally determined on a first-in, first-out basis.
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 the estimated useful lives of the assets.
Buildings and improvements estimated useful lives primarily range from 10 to 40
years, with the majority in the range from 20 to 40 years. Machinery and
equipment estimated useful lives primarily range from 3 to 15 years, with the
majority in the range from 5 to 10 years. 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.
46
Effective January 1, 2002, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 144. 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.
Goodwill: Goodwill is the excess of cost of an acquired entity over the
amounts assigned to assets acquired and liabilities assumed in a 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 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. Reporting units are one level
below the business segment level, but can be combined when reporting units
within the same segment have similar economic characteristics. 3M, at year-
end 2002, had 20 reporting units under the criteria set forth by SFAS No. 142.
The vast majority of goodwill relates to and is assigned directly to a
specific reporting unit. 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, or by using a
discounted cash flow analysis. The company completed its assessment of any
potential impairment upon adoption of this standard and upon its annual
assessment and determined that no impairments existed. 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. In Note 4 to
the Consolidated Financial Statements goodwill and indefinite-lived intangible
asset information is provided, including supplemental consolidated statement
of income information on a both a reported and adjusted basis.
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 2 to 17 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.
Revenue recognition: Revenue is recognized when the risks and rewards of
ownership have substantively transferred to customers, regardless of whether
legal title has transferred. This condition is normally met when the product
has been delivered or upon performance of services. The company sells a wide
range of products to a diversified base of customers around the world and,
therefore, believes there is no material concentration of credit risk. Prior
to 2000, the company recognized revenue upon shipment of goods to customers and
upon performance of services (refer to "Cumulative Effect of Accounting Change"
that follows).
Cumulative Effect of Accounting Change: During the fourth quarter of 2000,
the company changed its revenue recognition policies. Essentially, the
new policies recognize that the risks and rewards of ownership in many
transactions do not substantively transfer to customers until the
product has been delivered, regardless of whether legal title has
transferred. In addition to this change in accounting that affected
a substantial portion of its product sales, the company has revised
47
aspects of its accounting for services provided in several of its smaller
businesses. These new policies are consistent with the guidance contained
in SEC Staff Accounting Bulletin No. 101. The effect of these changes in
revenue recognition policies, as of January 1, 2000, is reported as the
cumulative effect of an accounting change in 2000. This change did not have
a significant effect on prior year results.
Advertising and merchandising: These costs are charged to operations in the
year incurred.
Internal-use software: The company capitalizes direct costs of materials and
services used in the development of internal-use software. Amounts capitalized
are amortized on a straight-line basis over a period of 3 to 5 years and are
reported as a component of machinery and equipment within property, plant and
equipment.
Environmental: Environmental expenditures relating to existing conditions
caused by past operations that do not contribute to current or future revenues
are expensed. Liabilities for remediation costs are recorded on an
undiscounted basis when they are probable and reasonably estimable, generally
no later than the completion of feasibility studies or the company's commitment
to a plan of action.
Income Taxes: The provision for income taxes is determined using the asset and
liability approach. Under this approach, deferred income taxes represent the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities.
Accounting for stock-based compensation: The intrinsic value method is used
per APB 25 and generally no compensation cost is recognized for either the
General Employees' Stock Purchase Plan (GESPP) or the Management Stock
Ownership Program (MSOP). The General Employees' Stock Purchase Plan is
considered non-compensatory. Pro forma amounts based on the options' estimated
fair value, net of tax, at the grant dates for awards under the GESPP and MSOP
follow.
- --------------------------------------------------------------------------
Pro forma Net Income and Earnings Per Share
(Millions) 2002 2001 2000
- --------------------------------------------------------------------------
Net income, as reported $1,974 $1,430 $1,782
Add: Stock based compensation expense
included in net income, net of
related tax effects 2 12 --
Deduct: Total stock-based compensation
expense determined under fair value,
net of related tax effects (144) (164) (114)
Pro forma net income 1,832 1,278 1,668
- --------------------------------------------------------------------------
Earnings per share - basic
As reported $ 5.06 $ 3.63 $ 4.50
Pro forma 4.70 3.24 4.22
- --------------------------------------------------------------------------
Earnings per share - diluted
As reported $ 4.99 $ 3.58 $ 4.45
Pro forma 4.63 3.20 4.17
- --------------------------------------------------------------------------
Comprehensive income: Total comprehensive income and the components of
accumulated other comprehensive income (loss) are presented in the Consolidated
Statement of Changes in Stockholders' Equity and Comprehensive Income.
Accumulated other comprehensive income (loss) is composed of foreign currency
translation effects (including hedges of net investments in international
companies), minimum pension liability adjustments, unrealized gains and losses
on available-for-sale debt and equity securities, and unrealized gains and
losses on cash flow hedging instruments.
Earnings per share: The difference in the weighted average shares outstanding
for calculating basic and diluted earnings per share is attributable to the
dilution associated with the company's stock-based compensation plans. Refer
to Note 17 to the Consolidated Financial Statements for the computation of
basic and diluted earnings per share for each year.
48
Derivatives and hedging activities: Effective January 1, 2001, the company
adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138.
This new accounting standard requires that all derivative instruments be
recorded on the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships. The effect of adopting
this standard was not material to the company's consolidated financial
statements.
The company uses interest rate swaps, currency swaps, and forward and option
contracts to manage risks generally associated with foreign exchange rate,
interest rate and commodity market volatility. All hedging instruments are
designated and effective as hedges, in accordance with U.S. generally accepted
accounting principles. If the underlying hedged transaction ceases to exist,
all changes in fair value of the related derivatives that have not been settled
are recognized in current earnings. Instruments that do not qualify for hedge
accounting are marked to market with changes recognized in current earnings.
The company does not hold or issue derivative financial instruments for trading
purposes and is not a party to leveraged derivatives.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations", which must be adopted no later than January 1, 2003. This
statement establishes accounting standards for recognition and measurement of a
liability for an asset retirement obligation and the associated asset
retirement cost. The company is reviewing the requirements of this standard.
The company does not expect this standard to materially impact its consolidated
financial position or results of operations.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." Statements 4 and 64 deals with the
extinguishment of debt. Statement 44 deals with the accounting for intangible
assets of motor carriers, and Statement 13 deals with accounting for leases.
The company expects the changes to Statements 4, 44, 64, and 13 and the
Technical Corrections will not materially impact its consolidated financial
position or results of operations.
In July 2002, the Financial Accounting Standards Board issued SFAS 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
new standard to principally impact the ultimate timing of when charges are
recorded as opposed to the amount of the ultimate charge.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies (for guarantees issued after
January 1, 2003) that a guarantor is required to recognize, at the inception of
a guarantee, a liability for the fair value of the obligations undertaken in
issuing the guarantee. At December 31, 2002, 3M does not have any significant
guarantees. Disclosures concerning guarantees are found in Note 18 to the
Consolidated Financial Statements.
In December 2002, the Financial Accounting Standards Board issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure. An amendment of FASB Statement No. 123."
The company is choosing to continue with its current
49
practice of applying the recognition and measurement principles
of APB No. 25, "Accounting for Stock Issued to Employees." The company has
adopted the disclosure requirements of SFAS No. 148.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities." This
interpretation addresses the requirements for business enterprises to
consolidate related entities in which they are determined to be the primary
economic beneficiary as a result of their variable economic interests. The
interpretation is intended to provide guidance in judging multiple economic
interests in an entity and in determining the primary beneficiary. The
interpretation outlines disclosure requirements for VIEs in existence prior to
January 31, 2003, and outlines consolidation requirements for VIEs created
after January 31, 2003. The company has reviewed its major commercial
relationships and its overall economic interests with other companies
consisting of related parties, contracted manufacturing vendors, companies in
which it has an equity position, and other suppliers to determine the extent
of its variable economic interest in these parties. The review has not
resulted in a determination that 3M would be judged to be the primary economic
beneficiary in any material relationships, or that any material entities would
be judged to be Variable Interest Entities of 3M. The company believes it has
appropriately reported the economic impact and its share of risks of its
commercial relationships through its equity accounting along with appropriate
disclosure of its purchase guarantees and other commitments.
NOTE 2. RESTRUCTURING CHARGES
During the first half of 2001, the company developed and announced a
restructuring plan that consolidates certain operations and streamlines the
organization to increase speed and productivity. In June 2001, the company
completed the identification of the significant actions to be taken and
obtained approvals from the appropriate level of management. In the fourth
quarter of 2001, the company obtained approvals for certain additional actions.
These actions were substantially completed by June 30, 2002.
In the first six months of 2002, 3M incurred $202 million of pre-tax expense
relating to the restructuring plan. The 2002 charges relate to employee
severance and benefits ($111 million), accelerated depreciation ($47 million)
and other ($44 million). During 2001, 3M incurred $569 million of pre-tax
expenses principally related to the restructuring plan. The 2001 charges relate
to employee severance and benefits ($472 million), accelerated depreciation
($80 million) and other ($17 million).
The severance charges were taken in the quarter when management approved the
plans and after severance benefits had been communicated to the employees. The
accelerated depreciation (incremental charges resulting from shortened
depreciable lives, primarily related to downsizing or consolidating
manufacturing operations) related to assets included in property, plant and
equipment. Estimated salvage values were based on estimates of proceeds upon
sale of certain affected assets. The charges related to 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.
In connection with its restructuring plan, the company eliminated a total of
about 6,900 positions. These positions represent a wide range of functions
throughout the company. Of the 6,900 employment reduction for the total plan,
about 45 percent occurred in the United States, 30 percent in Europe, and the
balance in other international areas. All business segments were impacted
directly and also indirectly through reduced allocations of corporate staff
service costs. The impact of the total restructuring, including the allocated
portion of restructured staff services, is estimated by segment as follows:
Industrial, 35 percent; Electro and Communications, 20 percent; Transportation,
Graphics and Safety, 20 percent; Health Care, 10 percent; Consumer and Office,
10 percent; and Specialty Material, 5 percent. These estimates are provided
only as a frame of reference as to the order of magnitude by segment. In order
to enhance segment comparability and reflect management's focus on ongoing
operations, these restructuring costs have not been recorded in the individual
business segments.
50
Of the company's remaining current liability at December 31, 2002, $30 million
is classified in current liabilities (payroll) and $18 million is classified in
other current liabilities on the Consolidated Balance Sheet. The company
classified as long-term liabilities $43 million of its 2002 charges and $124
million of its 2001 charges. Special termination pension and medical benefits,
aggregating $43 million in 2002 and $62 million in 2001, were offered to
eligible employees. These benefits will generally be paid over their life
expectancies. In addition, of the $62 million in separation pay that was
deferred in 2001, $47 million was reclassified to current in 2002. The company
also recorded $3 million of non-cash stock option expense ($8 million in 2001)
due to the reclassification of certain employees age 50 and older to retiree
status, resulting in a modification of their original stock option awards for
accounting purposes. The current liabilities and a portion of the non-current
liabilities will be funded through cash provided by operations, while funding
for certain long-term special termination pension and medical liabilities will
be provided through established pension and postretirement trust funds. The
majority of the long-term portion of the liability, primarily special
termination pension and medical liabilities, is reflected as a component of
3M's pension and medical trust plans as a portion of the Accumulated Benefit
Obligation (ABO). It is estimated that 3M's benefit plans reflect
approximately $100 million of restructuring related long-term liabilities that
have not yet been paid out as of December 31, 2002.
The restructuring plan includes actions in 25 locations in the United States,
27 in Europe, eight in the Asia Pacific area, 13 in Latin America, and four in
Canada. Substantially all actions required by the plan were completed by June
30, 2002. The company has not discontinued any major product lines as a result
of the restructuring plan. The restructuring charges do not include any write-
down of goodwill or other intangible assets.
Selected information related to these charges follows.
- -----------------------------------------------------------------------
Employee
Severance
and Accelerated
(Millions) Benefits Depreciation Other Total
- -----------------------------------------------------------------------
Charges
Year 2001 charges $472 $ 80 $ 17 $569
Year 2002 charges 111 47 44 202
- -----------------------------------------------------------------------
Total charges $583 $127 $61 $771
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Current liability at
December 31, 2000 $ -- $ -- $ --
- -----------------------------------------------------------------------
2001 Charges 472 $ 80 17 569
2001 Cash payments (155) (4) (159)
2001 Non-cash and long-term
portion of liability (132) (80) -- (212)
- -----------------------------------------------------------------------
Current liability at
December 31, 2001 $185 $13 $198
- -----------------------------------------------------------------------
2002 Charges 111 $ 47 44 202
2002 Cash payments (267) (39) (306)
2002 Reclassification from
long-term portion of liability 47 -- 47
2002 Non-cash and long-term
portion of liability (46) (47) -- (93)
- -----------------------------------------------------------------------
Current liability at
December 31, 2002 $ 30 $ 18 $ 48
- -----------------------------------------------------------------------
51
Selected information related to the company's 1998 restructuring program
follows.
- --------------------------------------------------------------------------
Employee Write-down
Severance of Property,
and Plant and
(Millions) Benefits Equipment Other Total
- --------------------------------------------------------------------------
1998 charges $271 $143 $ 79 $493
1999 changes in estimates 4 (31) (1) (28)
- --------------------------------------------------------------------------
Total charges $275 $112 $ 78 $465
- --------------------------------------------------------------------------
December 31, 1998 liability $232 $ 32 $264
1999 cash payments (205) (23) (228)
1999 changes in estimates 4 (1) 3
- --------------------------------------------------------------------------
December 31, 1999 liability $ 31 $ 8 $ 39
2000 cash payments (24) (4) (28)
- --------------------------------------------------------------------------
December 31, 2000 liability $ 7 $ 4 $ 11
2001 cash payments (3) (2) (5)
- --------------------------------------------------------------------------
December 31, 2001 liability $ 4 $ 2 $ 6
2002 cash payments (4) (2) (6)
- --------------------------------------------------------------------------
December 31, 2002 liability $ -- $ -- $ --
- --------------------------------------------------------------------------
NOTE 3. ACQUISITIONS AND DIVESTITURES
General: In 2002, 2001 and 2000, all business combinations completed by the
company used the purchase method of accounting. Effective January 1, 2002, with
the adoption of SFAS No. 142, goodwill and indefinite-lived intangibles are no
longer amortized.
Year 2002 acquisitions: In December 2002, 3M purchased 100 percent of the
outstanding common shares of Corning Precision Lens, Inc., a wholly owned
subsidiary of Corning Incorporated, for $850 million in cash. Corning
Precision Lens, Inc. has become a wholly owned subsidiary of 3M, operating
under the name of 3M Precision Optics, Inc. The acquired company is a
manufacturer of lens systems for projection televisions, which will broaden
3M's technology position in the global display industry. The purchase
agreement between 3M and Corning Incorporated contains a contingency. This
contingency is based on the final working capital valuation of the assets
purchased and liabilities assumed as of the acquisition date. This
contingency has not been booked in 3M's balance sheet as of December 31, 2002,
as the final amount of the asset or liability is not yet known. Any payment
or receipt of cash upon removal of this contingency will be booked as an
adjustment to goodwill in 3M's balance sheet. In relation to the size of the
transaction, this amount is not expected to be significant.
In December 2002, 3M purchased the 43 percent minority ownership of 3M Inter-
Unitek GmbH. 3M paid $304 million in cash to the minority interest shareholders
of 3M Inter-Unitek GmbH. 3M Inter-Unitek GmbH is the parent company of 3M ESPE
Dental AG.
During the year ended December 31, 2002, 3M completed seven additional business
combinations for a total cost of $139 million, which was paid with $104 million
in cash, net of cash acquired, and $35 million of 3M common stock (277,792
common shares). A summary of the seven business combinations follows:
1) 3M (Industrial segment) purchased certain assets and specified liabilities
of Emtech Emulsion Technologies, Inc. and Emtech Manufacturing Corporation.
These companies are involved in the manufacture and sale of durable film label
materials.
2) 3M (Industrial segment) purchased certain assets and specified liabilities
of Polymer Manufacturing, Inc. This company, based in Oxnard, California, is a
manufacturer of two-part polyurethane adhesives, plastic repair materials,
sealants and related accessories.
3) 3M (Transportation, Graphics and Safety segment) purchased the shares of AiT
Corporation. AiT Corporation, based in Ottawa, Ontario, Canada, is a
manufacturer of travel ID security systems.
4) 3M (Health Care segment) purchased the shares of Ruffing IT. This company,
based in Germany, develops quality assurance software for medical records.
52
5) 3M (Health Care segment) purchased from GlaxoSmithKline the right to
manufacture and distribute the Migril product line in certain African nations.
Migril is an over-the-counter treatment for migraine attacks.
6) 3M (Industrial segment) purchased an 80 percent interest in certain assets
of Shanghai Grinding Wheel Works, a Chinese company. These assets will be used
to manufacture and sell coated abrasive products.
7) 3M (Electro and Communications segment) purchased an additional 6 percent of
Quante AG (a telecommunications supplier).
The preliminary purchase price allocations and the resulting impact on the
Consolidated Balance Sheet in 2002 for business combinations are summarized as
follows.
- ------------------------------------------------------------------------------
Asset(Liability)
Corning 3M Aggregation
Precision Inter-Unitek of Remaining Total
(Millions) Lens, Inc. GmbH Acquisitions Activity
- ------------------------------------------------------------------------------
Accounts receivable $ 36 $ -- $ 7 $ 43
Inventory 21 5 5 31
Other current assets 1 -- -- 1
Property, plant, and equipment 107 11 118
Purchased indefinite-lived
intangible assets -- -- 2 2
Purchased identifiable
intangible assets 36 -- 9 45
Purchased goodwill 672 12 101 785
Accounts payable and
other current liabilities (23) -- (6) (29)
Interest bearing debt -- -- (4) (4)
Minority interest liability -- 289 14 303
Other long-term liabilities -- (2) -- (2)
- -----------------------------------------------------------------------------
Net assets acquired $850 $304 $139 $1,293
- -----------------------------------------------------------------------------
Cash, net of cash acquired $850 $304 $104 $1,258
Non-cash (3M shares at
fair value) -- -- 35 35
- -----------------------------------------------------------------------------
Net assets acquired $850 $304 $139 $1,293
- -----------------------------------------------------------------------------
The valuation of certain tangible and intangible assets relating to the Corning
Precision Lens, Inc. acquisition and other acquisitions is not final; thus the
purchase price allocations are subject to further refinement. The above
purchased identifiable intangible assets of $45 million will be amortized on a
straight-line basis over lives ranging from 2 to 17 years (weighted-average
life of 10.6 years). There were no in-process research and development charges
associated with these acquisitions. Pro forma information related to these
acquisitions is not included because the impact of these acquisitions, either
individually or in the aggregate, on the company's consolidated results of
operations is not considered to be significant.
Year 2001 acquisitions: In 2001, the company completed three notable business
combinations and also acquired five smaller businesses for a total purchase
price of $218 million (net of cash acquired), plus 1,124,135 shares of 3M
common stock. 3M acquired MicroTouch Systems, Inc., a touch screen
manufacturer, for $158 million in cash, net of cash acquired. 3M also
acquired Robinson Nugent, Inc., a telecommunications supplier, in exchange
for 1,124,135 shares of 3M common stock that had a fair market value
of $127 million as of the acquisition date. 3M also combined its German
dental business (3M Inter-Unitek GmbH, an existing 3M subsidiary) with
ESPE Dental AG, a dental products manufacturer. 3M Inter-Unitek GmbH
acquired 100 percent of the outstanding shares of ESPE Dental AG in
exchange for 43 percent ownership in 3M Inter-Unitek GmbH and $25 million,
net of cash acquired. Upon completion of this transaction, and as of
December 31, 2001, 3M held a 57 percent controlling interest in 3M Inter-
Unitek GmbH and consolidated it with a provision for the minority interest
53
that did not have participating rights. As stated previously, 3M purchased
the remaining minority interest shares of 3M Inter-Unitek GmbH in 2002.
The 2001 purchased intangible assets, including goodwill, through December 31,
2001, are being amortized on a straight-line basis over the periods benefited,
ranging from 4 to 40 years. In accordance with SFAS No. 142, goodwill and
indefinite-lived intangible assets are not amortized effective January 1, 2002.
In-process research and development charges associated with these acquisitions
were not material. Pro forma information related to these acquisitions is not
provided because the impact of these acquisitions on the company's consolidated
results of operations is not considered to be significant.
Year 2000 acquisitions: During 2000, 3M acquired 91 percent (subsequently
increased to 99 percent), of Quante AG (a telecommunications supplier), 100
percent of the multi-layer integrated circuit packaging line of W.L. Gore and
Associates, and seven smaller businesses for a total purchase price of $472
million in cash (net of cash acquired) plus 128,994 shares of 3M common stock.
The stock had a fair market value of $11 million at the acquisition date and
was previously held as 3M treasury stock.
The 2000 purchased intangible assets, including goodwill, through December 31,
2001, are being amortized on a straight-line basis over the periods benefited,
ranging from 3 to 20 years. In accordance with SFAS No. 142, goodwill and
indefinite-lived intangible assets are not amortized effective January 1, 2002.
In-process research and development charges associated with these acquisitions
were not significant. Pro forma information related to these acquisitions is
not included because the impact of these acquisitions on the company's
consolidated results of operations is not considered to be significant.
Consolidated balance sheet purchase price allocations for 2001 and 2000: The
purchase price allocations and the resulting impact on the consolidated balance
sheet relating to all 2001 and 2000 business combinations follow.
- ---------------------------------------------------
Asset (Liability)
(Millions)
2001 2000
- ---------------------------------------------------
Accounts receivable $ 67 $ 86
Inventories 64 112
Other current assets 19 13
Property, plant and equipment 110 179
Purchased intangible assets 473 326
Other assets 23 30
Accounts payable and
other current liabilities (138) (93)
Interest bearing debt (16) (123)
Minority interest liability (243) --
Other long-term liabilities (14) (47)
- ---------------------------------------------------
Net assets acquired $345 $483
- ---------------------------------------------------
Cash, net of cash acquired $218 $472
Non-cash (3M shares at
fair value) 127 11
- ---------------------------------------------------
Net assets acquired $345 $483
- ---------------------------------------------------
Subsequent events: In early 2003, 3M completed two business combinations.
These combinations had no impact on either 2002 operating results or the
balance sheet as of December 31, 2002. 3M purchased an additional 25 percent
of Sumitomo 3M Limited, a Japanese company, from NEC Corporation for
approximately $375 million. Prior to this purchase, 3M controlled and owned
50 percent of Sumitomo 3M Limited and fully consolidated both Sumitomo 3M
Limited's balance sheet and results of operations, with a provision for the
minority interest that did not have participating rights. In a smaller
acquisition, 3M acquired 100 percent of the common shares of Solvay
54
Fluoropolymers, which has manufacturing facilities located in Decatur,
Alabama. Although purchase price allocations have not been finalized at
this time, 3M expects no in-process research and development charges
resulting from these acquisitions. Pro forma information related to these
acquisitions is not included because the impact of these acquisitions, either
individually or in the aggregate, on the company's consolidated results of
operations is not considered to be significant.
NOTE 4. GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS
The goodwill balance by business segment as of January 1, 2002 and December 31,
2002 follows. Goodwill recognized in 2002 totaled $785 million, with $721
million expected to be fully deductible for tax purposes. The increase in the
goodwill balance in 2002 primarily relates to the nine 2002 business
combinations previously discussed and changes in foreign currency exchange
rates during the period.
- ------------------------------------------------------------------------------
Goodwill Jan. 1 2002 2002 Dec. 31
2002 Acqui- Translation 2002
(Millions) balance sitions and Other balance
- ------------------------------------------------------------------------------
Transportation, Graphics and Safety $ 171 $ 697 $ 12 $880
Health Care 330 16 47 393
Industrial 20 78 (2) 96
Consumer and Office 19 -- -- 19
Electro and Communications 366 (6) 21 381
Specialty Material 106 -- 23 129
- ------------------------------------------------------------------------------
Total Company $1,012 $ 785 $ 101 $1,898
- ------------------------------------------------------------------------------
In accordance with SFAS No. 142, beginning January 1, 2002, 3M no longer
amortizes goodwill and certain indefinite-lived intangible assets.
Amortization expense by business segment relating to goodwill and indefinite-
lived intangible assets for the years ended December 31, 2001 and 2000 follows.
- ----------------------------------------------------------------
Amortization expense Year Year
(Millions) 2001 2000
- ----------------------------------------------------------------
Transportation,
Graphics and Safety $13 $ 5
Health Care 22 15
Industrial 1 3
Consumer and Office 2 2
Electro and Communications 23 14
Specialty Material 6 5
- ----------------------------------------------------------------
Total Company $67 $44
Income taxes (12) (12)
Minority interest (4) -
- ----------------------------------------------------------------
Amortization - net of income
taxes and minority interest $51 $32
- ----------------------------------------------------------------
55
The impact of Statement No. 142 on reported results follows.
- -----------------------------------------------------------------------
Goodwill and Indefinite-Lived Tradenames
Supplemental Consolidated Statement of Income Information
Twelve months ended December 31
(Millions, except per-share amounts) 2002 2001 2000
- -----------------------------------------------------------------------
Reported net income $1,974 $1,430 $1,782
- -----------------------------------------------------------------------
Add back:
Goodwill amortization, net -- 48 30
Indefinite-lived tradename
amortization, net -- 3 2
- -----------------------------------------------------------------------
Adjusted net income $1,974 $1,481 $1,814
- -----------------------------------------------------------------------
Earnings per share - basic
Reported net income $ 5.06 $ 3.63 $ 4.50
Goodwill amortization, net -- 0.12 0.08
Indefinite-lived tradename
amortization, net -- 0.01 --
- -----------------------------------------------------------------------
Adjusted net income $ 5.06 $ 3.76 $ 4.58
- -----------------------------------------------------------------------
Earnings per share - diluted
Reported net income $ 4.99 $ 3.58 $ 4.45
Goodwill amortization, net -- 0.11 0.09
Indefinite-lived tradename
amortization, net -- 0.01 --
- -----------------------------------------------------------------------
Adjusted net income $ 4.99 $ 3.70 $ 4.54
- -----------------------------------------------------------------------
Acquired Intangible Assets
The carrying amount and accumulated amortization of acquired intangible assets
follow.
- -----------------------------------------------------------------------
(Millions) Dec. 31 Jan. 1
2002 2002
- -----------------------------------------------------------------------
Patents $297 $241
Other amortizable intangible assets 93 85
Non-amortizable intangible assets (tradenames) 61 52
- -----------------------------------------------------------------------
Total gross carrying amount 451 378
- -----------------------------------------------------------------------
Accumulated amortization - patents (123) (91)
Accumulated amortization - other (59) (49)
- -----------------------------------------------------------------------
Less total accumulated amortization (182) (140)
- -----------------------------------------------------------------------
Total intangible assets, net $269 $238
- -----------------------------------------------------------------------
Amortization expense for acquired intangible assets (excluding amortization of
goodwill and indefinite-lived intangible assets of $67 million and $44 million
in 2001 and 2000, respectively) for the years ended December 31, 2002, 2001 and
2000 follows.
- ---------------------------------------------------------------------
Year Year Year
(Millions) 2002 2001 2000
- ---------------------------------------------------------------------
Amortization expense $ 39 $ 32 $ 21
- ---------------------------------------------------------------------
56
Expected amortization expense for acquired intangible assets recorded as of
December 31, 2002 follows.
- --------------------------------------------------------------------------
After
(Millions) 2003 2004 2005 2006 2007 2007
- --------------------------------------------------------------------------
Amortization
expense $35 $32 $26 $22 $20 $73
- --------------------------------------------------------------------------
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.
NOTE 5. SUPPLEMENTAL STATEMENT OF INCOME INFORMATION
- ---------------------------------------------------------------------------
(Millions) 2002 2001 2000
- ---------------------------------------------------------------------------
Research, development and related expenses $1,070 $1,084 $1,101
Advertising and merchandising costs 372 407 519
- ---------------------------------------------------------------------------
Research and development expenses, covering basic scientific research and the
application of scientific advances to the development of new and improved
products and their uses, totaled $738 million, $745 million and $727 million in
2002, 2001 and 2000, respectively. Related expenses primarily include technical
support provided by the laboratories for existing products.
NOTE 6. SUPPLEMENTAL BALANCE SHEET INFORMATION
- -----------------------------------------------------------------------------
(Millions) 2002 2001
- -----------------------------------------------------------------------------
Accounts receivable
- -----------------------------------------------------------------------------
Accounts receivable $ 2,615 $ 2,569
Less allowances 88 87
- -----------------------------------------------------------------------------
Accounts receivable - net $ 2,527 $ 2,482
- -----------------------------------------------------------------------------
Inventories
- -----------------------------------------------------------------------------
Finished goods $ 1,011 $ 1,103
Work in process 591 611
Raw materials 329 377
- -----------------------------------------------------------------------------
Total inventories $ 1,931 $ 2,091
- -----------------------------------------------------------------------------
Other current assets
- -----------------------------------------------------------------------------
Product and other insurance receivables $ 313 $ 304
Deferred income taxes 231 290
Other 439 513
- -----------------------------------------------------------------------------
Total other current assets $ 983 $ 1,107
- -----------------------------------------------------------------------------
Investments
- -----------------------------------------------------------------------------
Available-for-sale (fair value) $ 10 $ 37
Equity-method 38 28
Cash surrender value of life insurance policies, real
estate and other (cost, which approximates fair value) 190 210
- -----------------------------------------------------------------------------
Total investments $ 238 $ 275
- -----------------------------------------------------------------------------
57
Supplemental Balance Sheet Information (continued)
- -----------------------------------------------------------------------------
(Millions) 2002 2001
- -----------------------------------------------------------------------------
Property, plant and equipment - at cost
- -----------------------------------------------------------------------------
Land $ 238 $ 224
Buildings and leasehold improvements 3,979 3,510
Machinery and equipment 10,450 10,208
Construction in progress 391 423
- -----------------------------------------------------------------------------
15,058 14,365
Less accumulated depreciation 9,437 8,750
- -----------------------------------------------------------------------------
Property, plant and equipment - net $ 5,621 $ 5,615
- -----------------------------------------------------------------------------
Intangible assets
- -----------------------------------------------------------------------------
Patents $ 174 $ 150
Tradenames 61 52
Other intangible assets 34 36
- -----------------------------------------------------------------------------
Total intangible assets $ 269 $ 238
- -----------------------------------------------------------------------------
Other assets
- -----------------------------------------------------------------------------
Prepaid pension benefits 467 537
Product and other insurance receivables 446 481
Deferred income taxes 210 152
Other 121 --
- -----------------------------------------------------------------------------
Total other assets $ 1,244 $ 1,170
- -----------------------------------------------------------------------------
Other current liabilities
- -----------------------------------------------------------------------------
Employee benefits and withholdings $ 357 $ 295
Accrued trade payables 279 267
Deferred income 198 188
Property and other taxes 157 153
Product and other claims 122 119
Deferred income taxes 10 16
Other 223 210
- -----------------------------------------------------------------------------
Total other current liabilities $ 1,346 $ 1,248
- -----------------------------------------------------------------------------
Other liabilities
- -----------------------------------------------------------------------------
Non-funded pension and postretirement benefits $ 1,220 $ 633
Minority interest in subsidiaries 294 527
Deferred income taxes 346 469
Employee benefits 412 355
Product and other claims 332 335
Deferred income 112 94
Other 23 78
- -----------------------------------------------------------------------------
Total other liabilities $ 2,739 $ 2,491
- -----------------------------------------------------------------------------
At December 31, 2002 and 2001, respectively, product and other insurance
receivables (current and long-term) include $339 million and $406 million
related to the breast implant matter, $264 million and $223 million related to
respirator/mask/asbestos litigation, and $156 million in both 2002 and 2001 for
other insurance receivables. Although at December 31, 2002, receivables for
insurance recoveries related to the breast implant matter of $323 million
continue to be contested by insurance carriers, management, based on the
opinion of counsel, believes such amounts will ultimately be collected.
Accounts payable includes drafts payable on demand of $75 million at December
31, 2002, and $83 million at December 31, 2001.
58
NOTE 7. Supplemental Stockholders' Equity and Comprehensive Income Information
Common stock ($.01 par value per share) of 1.5 billion shares is authorized,
with 472,016,528 shares issued in 2002, 2001 and 2000. Common stock and capital
in excess of par includes $231 million transferred from common stock to capital
in excess of par value during 2000 in connection with the change in par value
of the company's common stock from $.50 to $.01 per share. Treasury stock is
reported as cost, with 81,820,847 shares at December 31, 2002, and 80,712,892
shares at December 31, 2001. Preferred stock, without par value, of 10 million
shares is authorized but unissued.
The components of the ending balances of accumulated other comprehensive income
(loss) follows.
- -------------------------------------------------------------------------------------
Accumulated Other Comprehensive Income (Loss)
(Millions) 2002 2001 2000
- -------------------------------------------------------------------------------------
Cumulative translation - net $ (858) $(1,152) $(885)
Minimum pension liability adjustments - net (1,130) (74) (58)
Debt and equity securities, unrealized gain - net 1 12 29
Cash flow hedging instruments, unrealized gain (loss)- net (39) 9 --
- -------------------------------------------------------------------------------------
Total accumulated other comprehensive income (loss) $(2,026) $(1,205) $(914)
- -------------------------------------------------------------------------------------
The minimum pension liability adjustment is calculated on an annual basis. If
the accumulated benefit obligation (ABO) exceeds the fair value of pension
assets, the employer must recognize a liability that is at least equal to the
unfunded ABO. In the fourth quarter of 2002, 3M recorded a minimum pension
liability adjustment within other comprehensive income of $1.056 billion (net
of tax).
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 are made to avoid
double counting in comprehensive income items that are also displayed as part
of net income. A summary of these reclassification adjustments follows.
- -----------------------------------------------------------------------------
Reclassification Adjustments to Comprehensive Income
(Millions) 2002 2001 2000
- -----------------------------------------------------------------------------
Gains on sale or donation of equity securities,
net of tax provision of $2 million, $9 million
and $39 million, respectively,
for 2002, 2001 and 2000 $ 3 $ 14 $ 62
Write-down of equity securities, net of tax benefit
of $3 million and $3 million, respectively
for 2002 and 2001 (5) (5) --
Cash flow hedging instruments, gains (losses) - net
of tax benefit of $18 million and tax provision
of $8 million, respectively, for 2002 and 2001 (30) 13 --
- -----------------------------------------------------------------------------
NOTE 8. SUPPLEMENTAL CASH FLOW INFORMATION
- ----------------------------------------------------------------------------
(Millions) 2002 2001 2000
- ----------------------------------------------------------------------------
Cash income tax payments $ 382 $ 520 $ 852
Cash interest payments 80 137 104
Capitalized interest 20 26 31
Depreciation 854 916 915
Amortization of software 61 74 45
Amortization of goodwill and
indefinite-lived tradenames -- 67 44
Amortization of patents and
other identifiable intangibles 39 32 21
- ----------------------------------------------------------------------------
Individual amounts on the Consolidated Statement of Cash Flows exclude the
effects of acquisitions, divestitures and exchange rate impacts, which are
presented separately. In 2000, the net impact of cumulative effect of
accounting changes is recorded in "Other - net" within operating activities.
PAGE <59>
In 2002, 3M purchased certain assets and specified liabilities of Emtech
Emulsion Technologies, Inc. and Emtech Manufacturing Corporation in exchange
for shares of 3M common stock that had a fair market value of $35 million.
Non-cash transactions occurring during 2001 included:
1) 3M acquired Robinson Nugent, Inc. in exchange for shares of 3M common stock
that had a fair market value of $127 million.
2) The company exchanged 43 percent ownership in 3M Inter-Unitek GmbH,
previously a wholly owned 3M subsidiary, for 87 percent of ESPE Dental AG. In
2001, 3M also paid $25 million in cash (net of cash acquired) such that 3M
Inter-Unitek GmbH owned 100 percent of the outstanding shares of ESPE Dental
AG. The value of the non-cash transaction in 2001 was estimated at
approximately $245 million. In 2002, 3M purchased the 43 percent minority
ownership in 3M Inter-Unitek GmbH for approximately $304 million. The
difference in these values relates to exchange rate changes and the strong
performance of the business. Refer to Note 3 in the Consolidated Financial
Statements for additional information about these transactions.
3) Dividends declared, but not paid at December 31, 2001, of $40 million were
payable to minority interests in consolidated subsidiaries.
NOTE 9. DEBT
- -----------------------------------------------------------------------------
Short-Term Debt Effective
(Millions) Interest Rate* 2002 2001
- -----------------------------------------------------------------------------
U.S. dollar commercial paper 1.33% $ 365 $ 731
Non-U.S. dollar commercial paper 2.87% 129 145
Dealer remarketable securities 5.67% 350 350
Long-term debt - current portion 2.10% 320 5
Long-term debt - current portion - ESOP
debt guarantee 5.62% 33 32
Other borrowings 5.51% 40 110
- -----------------------------------------------------------------------------
Total short-term debt $1,237 $1,373
- -----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Long-Term Debt Currency/ Effective
Fixed vs. Interest Maturity
(Millions) Floating Rate* Date 2002 2001
- --------------------------------------------------------------------------------
Convertible note USD Fixed 0.50% 2032 $ 550 $ --
4.15% medium-term note USD Floating 1.23% 2005 400 --
U.S. dollar (USD) 6.375% note USD Fixed 6.38% 2028 330 330
ESOP debt guarantee USD Fixed 5.62% 2004-2009 238 271
4.25% medium-term note USD Floating 1.11% 2004 200 200
4.90% medium-term note USD Floating 1.27% 2004 150 150
Dec. 2041 floating rate note USD Floating 1.05% 2041 100 100
Other borrowings Various 1.38% 2004-2040 172 469
- --------------------------------------------------------------------------------
Total long-term debt $2,140 $1,520
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Weighted-Average Effective Interest Rate*
Total Excluding ESOP debt
------------------- --------------------
At December 31 2002 2001 2002 2001
- ----------------------------------------------------------------------------
Short-Term 3.17% 3.98% 3.10% 3.94%
Long-Term 2.33% 3.60% 1.91% 3.15%
- ----------------------------------------------------------------------------
*Reflects the effects of interest rate and currency swaps at December 31.
The ESOP debt is serviced by dividends on stock held by the ESOP and by company
contributions. These contributions are not reported as interest expense, but
are reported as an employee benefit expense in the Consolidated Statement of
Income. Other borrowings includes debt held by 3M's international companies
and floating rate notes in the United States, with the long-term portion of
this debt primarily comprised of U.S. Dollar floating rate debt. Other
borrowings in 2001 also includes certain debt that becomes due in 2003. As a
result, other borrowings in long-term debt decreased significantly in 2002,
with the corresponding increase reflected in the current portion of long-term
debt.
60
Maturities of long-term debt for the next five years are: 2003, $353 million;
2004, $385 million; 2005, $437 million; 2006, $39 million; and 2007, $40
million.
At year-end 2002, available short-term lines of credit totaled about $656
million, of which $64 million was outstanding. The company also has
uncommitted lines of credit totaling $250 million. Debt covenants do not
restrict the payment of dividends.
On November 15, 2002, 3M sold $639 Million in aggregate face amount of 30-year
zero coupon senior notes (the "Convertible Notes") that are convertible into
shares of 3M common stock. The gross proceeds from the offering, to be used
for general corporate purposes, were $550 million ($540 million net of
issuance costs). The terms of the Convertible Notes include a yield to
maturity of .50 percent and an initial conversion premium of 40 percent over
the $130.00 closing price of 3M common stock on November 14, 2002. If certain
conditions for conversion (relating to the closing common stock prices of 3M
exceeding certain thresholds for specified periods) are met, holders may
convert each of the 30-year zero-coupon senior notes into 4.7301 shares of 3M
common stock in any calendar quarter commencing after March 31, 2003. If the
conditions for conversion are met, and 3M elects not to settle in cash, the
30-year zero-coupon senior notes will be convertible in the aggregate into
approximately 3.0 million shares of 3M common stock. 3M may redeem the 30-year
zero-coupon senior notes at any time in whole or in part, after five years at
the greater of the accreted conversion price or the current market price.
Holders of the 30-year zero-coupon senior notes have the option to require 3M
to purchase their notes at accreted value in years three, five, 10, 15, 20 and
25. 3M may choose to pay the redemption purchase price in cash and/or common
stock. Debt issuance costs are amortized on a straight-line basis over a
three-year period beginning in November 2002. There was no impact on 3M's
2002 diluted earnings per share, as the conversion rights commence after March
31, 2003. On February 14, 2003, 3M registered these Convertible Notes in a
registration statement filed with the Securities and Exchange Commission.
In December 2000, the company issued approximately $350 million of debt
securities, which is classified as short-term debt. The remarketable
securities can be remarketed annually, at the option of the dealer, for a year
each time, with a final maturity date of December 2010. In December 2002, the
company's dealer remarketable securities were remarketed for one year. They
were reissued with a fixed coupon rate of 5.6736 percent.
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. 3M
plans to use the net proceeds from future issuances of debt securities under
these registrations for general corporate purposes, including the repayment of
debt or the financing of possible acquisitions. As of December 31, 2002, $950
million of medium-term notes had been issued under the medium-term note
program and another $56 million of debt securities had been issued directly
from the shelf, aggregating $1.006 billion of outstanding debt securities
issued under the shelf.
NOTE 10. DERIVATIVES AND OTHER FINANCIAL 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. The information that follows
explains the various types of derivatives and financial instruments, followed
by a table that recaps 2002 and 2001 net investment hedging and cash flow
hedging amounts.
Foreign Currency Forward and Option Contracts: The company enters into
foreign exchange forward contracts, options and swaps to hedge against
the effect of exchange rate fluctuations on cash flows denominated in
foreign currencies and certain intercompany financing transactions.
These transactions are designated as cash flow hedges. At
December 31, 2002, the company had various open foreign exchange forward
61
and option contracts, the majority of which had maturities of one year
or less. The amounts at risk are not material because the company has
the ability to generate offsetting foreign currency cash flows. The settlement
or extension of these derivatives will result in reclassifications to earnings
in the period during which the hedged transactions affect earnings (from other
comprehensive income). The maximum length of time over which 3M is hedging its
exposure to the variability in future cash flows for a majority of the
forecasted transactions, excluding those forecasted transactions related to the
payment of variable interest on existing financial instruments, is 12 months.
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 certain foreign currency cash flow hedges. The company
recognized a $10 million pre-tax loss (recorded in cost of sales) related to
the discontinuance of these contracts. Hedge ineffectiveness was not material
for the year 2002 or 2001.
Interest Rate & Currency Swaps: The company manages interest expense using a
mix of fixed and floating rate debt. To help manage borrowing costs, the
company may enter into interest rate swaps. Under these arrangements, the
company agrees to exchange, at specified intervals, the difference between
fixed and floating interest amounts calculated by reference to an agreed-upon
notional principal amount. The company uses interest rate and currency swaps to
manage interest rate risk related to borrowings.
At December 31, 2002 the company has interest rate swaps with a fair value of
$37 million ($7 million at December 31, 2001) designated as fair value hedges
of underlying fixed rate obligations. The mark-to-market of these fair value
hedges is recorded as gains or losses in interest expense and is offset by the
gain or loss on the underlying debt instrument that is also recorded in
interest expense. All existing fair value hedges are 100 percent effective and
thus, there is no impact to earnings due to hedge ineffectiveness.
As circumstances warrant, the company also uses cross-currency interest rate
swaps to hedge foreign currency and interest rates. There were no cross-
currency interest rate swaps outstanding at December 31, 2002.
Net Investment Hedging: As circumstances warrant, the company uses foreign
currency debt and forwards to hedge portions of the company's net investments
in foreign operations. For hedges that meet the effectiveness requirements,
the net gains or losses are recorded in cumulative translation within other
comprehensive income, with any ineffectiveness recorded in cost of sales.
Hedge ineffectiveness resulted in after-tax realized gains totaling about $2
million in 2002 ($4 million in 2001).
Commodity Price Management: The company manages commodity price risks through
negotiated supply contracts, price protection swaps and forward physical
contracts. The company uses commodity price swaps as cash flow hedges of
forecasted transactions to manage price volatility. The related mark-to-market
gain or loss on qualifying hedges is included in other comprehensive income to
the extent effective (typically 100 percent effective), and reclassified into
cost of sales in the period during which the hedged transaction affects
earnings. 3M has hedged its exposure to the variability of future cash flows
for certain forecasted transactions through 2004. No significant commodity
cash flow hedges were discontinued during the year 2002 or 2001.
Net Investment Hedging and Cash Flow Hedging: Amounts recorded in cumulative
translation related to net investment hedging, and cash flow hedging instrument
disclosures follow. Reclassification adjustments are made to avoid double
counting in comprehensive income items that are also included as part of net
income. The amount of the reclassification adjustment recognized in other
comprehensive income is equal to, but opposite in sign from, the amount of the
realized gain or loss in net income.
62
- ---------------------------------------------------------
DERIVATIVES Twelve months ended
Net of Tax December 31
(Millions) 2002 2001
- ---------------------------------------------------------
Unrealized gain/(loss) recorded in cumulative translation
Net investment hedging $(17) $23
- ---------------------------------------------------------
Cash flow hedging instruments balance and activity
Beginning balance $ 9 $ 0
- ---------------------------------------------------------
Net unrealized holding
gain/(loss)* (78) 22
Reclassification
adjustment* 30 (13)
- ---------------------------------------------------------
Total activity (48) 9
- ---------------------------------------------------------
Ending balance $(39)** $ 9
- ---------------------------------------------------------
*Tax expense or benefit
Net unrealized holding
gain/(loss) $ 46 $(13)
Reclassification
adjustment (18) 8
- ---------------------------------------------------------
** Based on exchange rates at December 31, 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 $39 million (with the impact largely
offset by foreign currency cash flows from underlying hedged items).
Credit risk: The company is exposed to credit loss in the event of
nonperformance by counterparties in interest rate swaps, currency swaps, and
option and foreign exchange contracts. However, the company's risk is limited
to the fair value of the instruments. The company actively monitors its
exposure to credit risk through the use of credit approvals and credit limits,
and by selecting major international banks and financial institutions as
counterparties. The company does not anticipate nonperformance by any of these
counterparties.
Fair value of financial instruments: At December 31, 2002 and 2001, the
company's financial instruments included cash and cash equivalents, accounts
receivable, investments, accounts payable, borrowing, and derivative contracts.
The fair values of cash and cash equivalents, accounts receivable, accounts
payable, and short-term debt (except the $350 million dealer remarketable
security) approximated carrying values because of the short-term nature of
these instruments. Available-for-sale investments and derivative contracts are
reported at fair values. Fair values for investments held at cost are not
readily available, but are believed to approximate fair value. The carrying
amounts and estimated fair values of other financial instruments based on
third-party quotes follows.
- ----------------------------------------------------------------------------
Financial Instruments Carrying Amounts and Estimated Fair Values
December 31, 2002 December 31, 2001
Carrying Fair Carrying Fair
(Millions) Amount Value Amount Value
- ----------------------------------------------------------------------------
Short-term debt - dealer
remarketable securities $ 350 $ 384 $ 350 $ 366
Long-term debt 2,140 2,244 1,520 1,494
- ----------------------------------------------------------------------------
63
NOTE 11. Income Taxes
At December 31, 2002, about $3.9 billion of unremitted earnings attributable to
international companies were considered to be indefinitely invested. No
provision has been made for taxes that might be payable if these earnings were
remitted to the United States. The company's intention is to reinvest these
earnings permanently or to repatriate the earnings when it is tax effective to
do so. It is not practicable to determine the amount of incremental taxes that
might arise were these earnings to be remitted. However, the company believes
that the United States foreign tax credits would largely eliminate any United
States taxes and offset any foreign withholding taxes due on remittance.
Annual tax provisions include amounts considered sufficient to pay assessments
that may result from examination of prior year tax returns; however, the amount
ultimately paid upon resolution of issues may differ materially from the amount
accrued.
As a result of certain employment commitments and capital investments made by
3M, income from manufacturing activities in certain countries is subject to
reduced tax rates or, in some cases, is exempt from tax for years through 2012.
The income tax benefits attributable to the tax status of these subsidiaries
are estimated to be $27 million (7 cents per diluted share) in 2002, $18
million (5 cents per diluted share) in 2001 and $24 million (6 cents per
diluted share) in 2000.
In the third quarter of 2002, the company made a $789 million tax deductible
contribution to its United States pension plan. The current income tax
provision includes a benefit for the pension contribution; the deferred
provision includes a cost for the related temporary difference. The company
also recorded a minimum pension liability (net of tax) within other
comprehensive income in 2002. The change in the year-end deferred tax balance
includes the effect of recording this minimum pension liability, in addition to
the annual provision for deferred income tax expense.
In 2000, the company recorded a cumulative effect of accounting change,
reducing earnings by $75 million net of tax. The provision for income taxes
excludes a $42 million tax benefit related to this cumulative effect.
64
- ----------------------------------------------------------------------------
Income before Income Taxes, Minority Interest
and Cumulative Effect of Accounting Change
(Millions) 2002 2001 2000
- -----------------------------------------------------------------------------
United States $1,725 $1,368 $1,798
International 1,280 818 1,176
- ----------------------------------------------------------------------------
Total $3,005 $2,186 $2,974
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Provision for Income Taxes
(Millions) 2002 2001 2000
- -----------------------------------------------------------------------------
Currently payable
Federal $ 43 $ 376 $ 471
State 12 47 64
International 332 278 401
Deferred
Federal 514 (7) 92
State 21 6 7
International 44 2 (10)
- -----------------------------------------------------------------------------
Total $ 966 $ 702 $1,025
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------
Components of Deferred Tax Assets
and Liabilities
(Millions) 2002 2001
- -----------------------------------------------------------------
Accruals currently not deductible
Employee benefit costs $547 $225
Product and other claims 167 173
Severance and other restructuring costs 18 73
Product and other insurance receivables (268) (286)
Accelerated depreciation (541) (464)
Other 162 236
- -----------------------------------------------------------------
Net deferred tax asset (liability) $ 85 $(43)
- -----------------------------------------------------------------
- -----------------------------------------------------------------------------
Reconciliation of Effective Income Tax Rate 2002 2001 2000
- -----------------------------------------------------------------------------
Statutory U.S. tax rate 35.0% 35.0% 35.0%
State income taxes - net of federal benefit 1.0 1.6 1.6
International income taxes - net (2.5) (.7) (.8)
Foreign export sales benefit (.5) (1.2) (.9)
U.S. business credits (.7) (1.1) (.7)
All other - net (.2) (1.5) .3
- -----------------------------------------------------------------------------
Effective worldwide tax rate 32.1% 32.1% 34.5%
- -----------------------------------------------------------------------------
65
NOTE 12. Business Segments
3M's businesses are organized, managed and internally reported as six segments
based on differences in products, technologies and services. These segments
are Transportation, Graphics and Safety; Health Care; Industrial; Consumer and
Office; Electro and Communications; and Specialty Material. These segments have
worldwide responsibility for virtually all of the company's product lines. 3M
is not dependent on any single product or market.
Transactions among reportable segments are recorded at cost. 3M is an
integrated enterprise characterized by substantial intersegment cooperation,
cost allocations and inventory transfers. Therefore, management does not
represent that these segments, if operated independently, would report the
operating income and other financial information shown. The allocations
resulting from the shared utilization of assets are not necessarily indicative
of the underlying activity for segment assets, depreciation and amortization,
and capital expenditures.
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
2000 and 2001, with no impact on operating income. These adjustments were
reflected in the company's Consumer and Office segment.
Effective July 1, 2002, the company also reclassified net sales and operating
income for the realignment of certain businesses from the Health Care segment
to the Consumer and Office segment. These businesses had net sales of $118
million and operating income of $7 million for total year 2001. This
realignment had no impact on total company net sales or operating income.
- ------------------------------------------------------------------------------
Business Segment Products
Business Segment Major Products
- ------------------------------------------------------------------------------
Transportation, Graphics Reflective sheeting, commercial graphics
and Safety systems, respirators, automotive components,
safety and security products, and optical films
- ------------------------------------------------------------------------------
Health Care Medical and surgical supplies, skin
health and infection prevention products,
pharmaceuticals, drug delivery systems,
dental and orthondontic products,
health information systems, microbiology
products, and closures for disposable diapers
- ------------------------------------------------------------------------------
Industrial Tapes, coated and nonwoven abrasives, and
specialty adhesives
- ------------------------------------------------------------------------------
Consumer and Office Sponges, scouring pads, high performance cloths,
consumer and office tapes, repositionable notes,
carpet and fabric protectors, energy control
products, home improvement products, floor
matting and commercial cleaning products,
visual systems and consumer health care products
- ------------------------------------------------------------------------------
Electro and Communications Packaging and interconnection devices,
insulating and splicing solutions
for the electronics, telecommunications and
electrical industries
- ------------------------------------------------------------------------------
Specialty Material Specialty materials for automotive, electronics,
telecommunications, textile and other
industries, and roofing granules
- ------------------------------------------------------------------------------
66
- ---------------------------------------------------------------------------
Business Segment Information Depr. Capital
Net Operating and Expendi-
(Millions) Sales Income Assets** Amort. tures
- ---------------------------------------------------------------------------
Transportation, 2002 $ 3,840 $ 915 $ 3,526 $ 212 $ 161
Graphics and Safety 2001 3,526 695 2,621 238 208
2000 3,518 783 2,741 186 239
- ---------------------------------------------------------------------------
Health Care 2002 3,560 900 2,409 171 183
2001 3,301 753 2,190 187 171
2000 3,007 667 1,929 175 179
- ---------------------------------------------------------------------------
Industrial 2002 3,225 563 2,155 154 144
2001 3,199 518 2,134 185 191
2000 3,525 641 2,392 213 214
- ---------------------------------------------------------------------------
Consumer and Office 2002 2,792 514 1,519 118 100
2001 2,817 454 1,588 127 114
2000 2,951 442 1,807 114 144
- ---------------------------------------------------------------------------
Electro and 2002 1,914 265 1,670 139 80
Communications 2001 2,171 218 1,807 157 132
2000 2,467 404 1,961 158 208
- ---------------------------------------------------------------------------
Specialty Material 2002 953 136 1,221 94 87
2001 1,022 141 1,208 97 136
2000 1,197 57 1,230 144 131
- ---------------------------------------------------------------------------
Corporate and 2002 48 (247) 2,829 66 8
Unallocated* 2001 18 (506) 3,058 98 28
2000 34 64 2,462 35 --
- ---------------------------------------------------------------------------
Total Company 2002 $16,332 $3,046 $15,329 $ 954 $ 763
2001 16,054 2,273 14,606 1,089 980
2000 16,699 3,058 14,522 1,025 1,115
- ---------------------------------------------------------------------------
*Corporate and Unallocated operating income principally includes corporate
investment gains and losses, certain derivative gains and losses, insurance-
related gains and losses, certain litigation expenses, restructuring charges
and other miscellaneous items. Because this category includes a variety of
miscellaneous items, it is subject to fluctuation on a quarterly and annual
basis.
**Segment assets primarily include accounts receivable; inventory; property,
plant and equipment - net; goodwill and intangible assets; and other
miscellaneous assets. The increase in 2002 assets for Transportation, Graphics
and Safety primarily related to the Corning Precision Lens, Inc. acquisition
in December 2002. Assets included in Corporate and Unallocated principally
are cash and cash equivalents; insurance receivables; deferred income taxes;
certain investments and other assets; and certain unallocated property, plant
and equipment.
Operating income in 2002 included non-recurring charges of $202 million related
to the restructuring plan (recorded in Corporate and Unallocated). Depreciation
and amortization of $954 million included accelerated depreciation (shortened
lives) of $47 million related to the restructuring (recorded in Corporate and
Unallocated).
Operating income in 2001 included non-recurring charges of $504 million. Non-
recurring charges, principally related to the company's restructuring plan,
totaled $569 million (recorded in Corporate and Unallocated). Acquisition-
related costs totaled $23 million ($10 million recorded in Health Care; $7
million in Transportation, Graphics and Safety; and $6 million in Electro and
Communications). Additional items recorded in Corporate and Unallocated
included a reversal of a 1999 litigation accrual of $73 million, and a gain of
$15 million related to the net impact of the sale and write-down of available-
for-sale equity securities. Depreciation and amortization of $1.089 billion
included accelerated depreciation (shortened lives) of $80 million related to
the restructuring (recorded in Corporate and Unallocated).
Operating income in 2000 included non-recurring net losses of $23 million.
Non-recurring costs included $168 million in the Specialty Material
segment related to the company's phase-out of perfluorooctanyl-based
chemistry products. This $168 million included $56 million of
accelerated depreciation (included in the Specialty Material
67
segment depreciation and amortization), $48 million of impairment losses,
and severance and other costs. Other non-recurring costs included a
$20 million write-down of corporate and unallocated assets, and $20 million
of other non-recurring expenses ($13 million related to acquisitions in
the Electro and Communications segment). Non-recurring operating income gains
in 2000 of $135 million were largely related to corporate and unallocated asset
dispositions, principally the sale of available-for-sale equity securities.
Operating income in 2000 also included a $50 million gain from the termination
of a product distribution agreement in the Health Care segment.
NOTE 13. GEOGRAPHIC AREAS
Geographic area information on the basis the company uses to manage its
businesses follows. Export sales and certain income and expense items are
reported within the geographic area where the final sales to customers are
made. Prior year amounts have been retroactively restated to conform to the
current-year presentation.
- ------------------------------------------------------------------------------
Geographic Area Information Latin
Europe America, Elimina-
and Africa tions
United Middle Asia and and Total
(Millions) States East Pacific Canada Other Company
- ------------------------------------------------------------------------------
Net sales to 2002 $7,426 $4,035 $3,431 $1,392 $ 48 $16,332
customers 2001 7,523 3,960 3,043 1,494 34 16,054
2000 7,835 3,946 3,329 1,562 27 16,699
- ------------------------------------------------------------------------------
Operating 2002 $1,180 $ 685 $1,009 $ 390 $ (218) $ 3,046
Income 2001 1,028 571 807 360 (493) 2,273
2000 1,160 589 961 376 (28) 3,058
- ------------------------------------------------------------------------------
Property, 2002 $3,523 $1,136 $ 676 $ 286 $ -- $ 5,621
plant and 2001 3,675 974 634 332 -- 5,615
equipment - 2000 3,699 1,046 711 367 -- 5,823
net
- ------------------------------------------------------------------------------
In 2002, operating income for eliminations and other includes non-recurring net
losses totaling $202 million, related to the restructuring. In 2001, operating
income for eliminations and other includes non-recurring net losses totaling
$504 million, primarily related to the restructuring. Also included in 2001
were a reversal of a 1999 litigation accrual, acquisition related costs, and a
net gain on the sale and write-down of available-for-sale equity securities.
NOTE 14. PENSION AND POSTRETIREMENT BENEFIT PLANS
3M has various company-sponsored retirement plans covering substantially all
U.S. employees and many employees outside the United States. Pension benefits
are based principally on an employee's years of service and compensation near
retirement. In addition to providing pension benefits, the company provides
certain postretirement health care and life insurance benefits for
substantially all of its U.S. employees who reach retirement age while
employed by the company. Most international employees and retirees are
covered by government health care programs. The cost of company-provided
health care plans for these international employees is not material.
The company's pension funding policy is to deposit with independent trustees
amounts at least equal to accrued liabilities, to the extent allowed by law.
Trust funds and deposits with insurance companies are maintained to provide
pension benefits to plan participants and their beneficiaries. In addition,
the company has set aside funds for its U.S. postretirement plan with an
independent trustee and makes periodic contributions to the plan.
During 2001, the company changed the measurement date of its U.S. employee
benefit plans (qualified and nonqualified pension benefit plans and its U.S.
postretirement benefit plan) from December 31 to September 30. Information
presented in the tables for 2001 reflects a measurement date of September 30,
2001, and December 31 for prior periods. This change did not have a material
impact on the determination of periodic pension cost or pension obligations.
Management believes this change is preferable to the method previously
employed, as it facilitates the benefit cost planning and forecasting process.
68
In the United States, the company has a qualified and non-qualified pension
plan. At September 30, 2002 (measurement date), the company's U.S. qualified
pension plan accumulated benefit obligation exceeded the fair value of plan
assets. The U.S. qualified pension plan accumulated benefit obligation was
$6.5 billion and plan assets totaled $5.9 billion. At September 30, 2002, and
September 30, 2001, the company's U.S. non-qualified pension plan had an
unfunded accumulated benefit obligation of $224 million and $196 million,
respectively. There are no plan assets in the non-qualified plan due to its
nature.
At December 31, 2002, international pension plans in the aggregate had an
accumulated benefit obligation of $2.4 billion and plan assets totaled $2.1
billion. Certain international pension plans were underfunded as of year-end
2002 and 2001. The accumulated benefit obligations of these plans were $1.089
billion in 2002 and $534 million in 2001. The assets of these plans were $682
million in 2002 and $287 million in 2001. The net underfunded amounts are
included in current and other liabilities on the Consolidated Balance Sheet.
- ----------------------------------------------------------------------------------------
Benefit Plan Information Qualified and Non-qualified Postretirement
Pension Benefits Benefits
--------------------------------- ---------------
United States International
-------------- --------------
(Millions) 2002 2001 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------
Reconciliation of projected
benefit obligation
Beginning balance $ 6,553 $5,905 $2,445 $2,368 $1,304 $1,166
Service cost 133 123 88 91 41 39
Interest cost 462 449 127 118 92 90
Participant contributions - - 10 8 16 10
Foreign exchange rate changes - - 271 23 - -
Plan amendments 3 1 - 7 (155) 1
Actuarial(gain)loss 438 305 85 (90) 277 74
Benefit payments (412) (279) (101) (75) (122) (76)
Settlements, curtailments,
special termination benefits
and other 44 49 (53) (5) - -
- ----------------------------------------------------------------------------------------
Ending balance $ 7,221 $6,553 $2,872 $2,445 $1,453 $1,304
- ----------------------------------------------------------------------------------------
Reconciliation of plan assets at fair value
Beginning balance $ 6,052 $6,954 $1,955 $2,011 $ 554 $ 601
Actual return on plan assets (536) (726) (171) (99) (120) (117)
Company contributions 809 104 277 53 297 135
Participant contributions - - 10 8 17 10
Foreign exchange rate changes - - 204 60 - -
Benefit payments (412) (279) (101) (73) (122) (75)
Settlements, curtailments
and other - - (104) (5) - -
- ----------------------------------------------------------------------------------------
Ending balance $ 5,913 $6,053 $2,070 $1,955 $ 626 $ 554
- ----------------------------------------------------------------------------------------
Funded status of plans
Plan assets at fair value
less benefit obligation $(1,308) $ (500) $ (802) $ (490) $ (827) $ (750)
Unrecognized transition
(asset) obligation - - - - - -
Unrecognized prior service cost 108 117 30 32 (162) (15)
Unrecognized (gain) loss 2,219 643 922 459 858 406
Fourth quarter contribution 5 3 - - 44 89
- ----------------------------------------------------------------------------------------
Net amount recognized $ 1,024 $ 263 $ 150 $ 1 $ (87) $ (270)
- ----------------------------------------------------------------------------------------
Amounts recognized in the
Consolidated Balance Sheet
consist of:
Prepaid assets $ - $ 424 $ 351 $ 102 $ - $ -
Accrued liabilities (790) (196) (456) (277) (87) (270)
Intangible assets 108 5 8 6 - -
Accumulated other comprehensive
income - pre-tax 1,706 30 247 170 - -
- ----------------------------------------------------------------------------------------
Net amount recognized $ 1,024 $ 263 $ 150 $ 1 $ (87) $ (270)
- ----------------------------------------------------------------------------------------
69
- ----------------------------------------------------------------------------------------
Benefit Plan Information Qualified and Non-qualified Postretirement
Pension Benefits Benefits
------------------------------------- ------------------
United States International
---------------- ----------------
(Millions) 2002 2001 2000 2002 2001 2000 2002 2001 2000
- ----------------------------------------------------------------------------------------
Components of net periodic
benefit cost
Service cost $133 $123 $125 $ 88 $ 91 $ 83 $ 41 $ 39 $ 39
Interest cost 461 449 416 127 118 98 92 90 82
Expected return on assets (606) (615) (565) (154) (142) (117) (71) (53) (47)
Amortization of transition
(asset)obligation - - - 3 1 2 - - -
Amortization of prior service
cost or benefit 14 13 13 7 8 8 (11) (11) (11)
Recognized net actuarial (gain)
loss 3 (9) (14) 16 11 7 17 10 3
- ----------------------------------------------------------------------------------------
Net periodic benefit cost $ 5 $(39) $(25) $ 87 $ 87 $ 81 $ 68 $ 75 $ 66
- ----------------------------------------------------------------------------------------
Curtailment, settlements and
special termination benefits 45 49 - 4 1 - - 12 -
Net periodic benefit cost
after curtailments
and settlements $ 50 $ 10 $(25) $ 91 $ 88 $ 81 $ 68 $ 87 $ 66
- ----------------------------------------------------------------------------------------
Weighted average assumptions
Discount rate at beginning
of year for service and
interest cost 7.25% 7.50% 7.50% 5.23% 5.40% 5.67% 7.25% 7.50% 7.50%
Expected return on assets 9.00% 9.00% 9.00% 7.25% 7.42% 7.14% 9.48% 9.50% 8.19%
Compensation rate increase 4.60% 4.60% 4.65% 3.58% 4.02% 4.28% 4.60% 4.60% 4.65%
Discount rate at year-end
for benefit obligation 6.75% 7.25% 7.50% 4.78% 5.23% 5.40% 6.75% 7.25% 7.50%
- -----------------------------------------------------------------------------------------
The company expects its health care cost trend rate for postretirement
benefits to slow from 7.5 percent in 2002 to 5.0 percent in 2006, after which
the rate is expected to stabilize. A one-percentage point change in the
assumed health care cost trend rates would have the following effects.
- -----------------------------------------------------------------------------
Health Care Cost One Percentage One Percentage
(Millions) Point Increase Point Decrease
- -----------------------------------------------------------------------------
Effect on current year's service
and interest cost $ 17 $(14)
Effect on benefit obligation 151 (131)
- -----------------------------------------------------------------------------
NOTE 15. EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLANS
The company sponsors employee savings plans under Section 401(k) of the
Internal Revenue Code. These plans are offered to substantially all regular
U.S. employees. Employee contributions of up to 6 percent of compensation are
matched at rates ranging from 25 to 50 percent, with additional company
contributions depending upon company performance. Only the company match is
invested in 3M stock, with employee funds invested in a number of investment
options. Vested employees may sell up to 50 percent of their 3M shares and
diversify into other investment options.
The company maintains an Employee Stock Ownership Plan (ESOP). This plan was
established in 1989 as a cost-effective way of funding the majority of the
company's contributions under 401(k) employee savings plans. Total ESOP shares
are considered to be shares outstanding for earnings per share calculations.
Dividends on shares held by the ESOP are paid to the ESOP trust and, together
with company contributions, are used by the ESOP to repay principal and
interest on the outstanding notes. The tax benefit related to dividends paid
on unallocated shares was charged directly to equity and totaled approximately
$6 million per year for 2002, 2001 and 2000. Over the life of the notes,
shares are released for allocation to participants based on the ratio of the
current year's debt service to the remaining debt service prior to the current
payment.
70
The ESOP has been the primary funding source for the company's employee
savings plans. As permitted by AICPA Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans", the Company has elected to
continue its practices, which are based on Statement of Position 76-3,
"Accounting Practices for Certain Employee Stock Ownership Plans" and
subsequent consensus of the Emerging Issues Task Force of the Financial
Accounting Standards Board. Accordingly, the debt of the ESOP is recorded as
debt, and shares pledged as collateral are reported as unearned compensation
in the Consolidated Balance Sheet and Consolidated Statement of Changes in
Stockholders' Equity and Comprehensive Income. Unearned compensation is
reduced symmetrically as the ESOP makes principal payments on the debt.
Expenses related to the ESOP include total debt service on the notes, less
dividends. The company contributes treasury shares, accounted for at fair
value, to employee savings plans to cover obligations not funded by the ESOP.
These amounts are reported as an employee benefit expense.
- ----------------------------------------------------------------------------
Employee Savings and Stock Ownership Plans
(Millions) 2002 2001 2000
- ----------------------------------------------------------------------------
Dividends on shares held by the ESOP $ 31 $ 31 $ 31
Company contributions to the ESOP 17 17 15
Interest incurred on ESOP notes 16 18 19
Expenses related to ESOP debt service 13 14 12
Expenses related to treasury shares 42 3 35
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
ESOP Debt Shares 2002 2001 2000
- ----------------------------------------------------------------------------
Allocated 7,407,590 7,241,681 6,898,666
Committed to be released 379,187 49,135 194,187
Unreleased 4,505,252 5,549,275 6,116,961
- ----------------------------------------------------------------------------
Total ESOP debt shares 12,292,029 12,840,091 13,209,814
- ----------------------------------------------------------------------------
NOTE 16. GENERAL EMPLOYEES' STOCK PURCHASE PLAN
In May 1997, shareholders approved 15 million shares for issuance under the
company's General Employees' Stock Purchase Plan (GESPP). Substantially all
employees are eligible to participate in the plan. Participants are granted
options at 85 percent of market value at the date of grant. There are no GESPP
shares under option at the beginning or end of each year because options are
granted on the first business day and exercised on the last business day of the
same month.
- -------------------------------------------------------------------------------
General Employees' 2002 2001 2000
Stock Purchase Plan ------------------ ----------------- ------------------
Exercise Exercise Exercise
Shares Price* Shares Price* Shares Price*
- -------------------------------------------------------------------------------
Options granted 932,955 $102.98 998,276 $93.85 1,206,262 $77.40
Options exercised (932,955) 102.98 (998,276) 93.85 (1,206,262) 77.40
- -------------------------------------------------------------------------------
Shares available for
grant - Dec. 31 8,632,495 9,565,450 10,563,726
- -------------------------------------------------------------------------------
*Weighted average
The weighted average fair value per option granted during 2002, 2001 and 2000
was $18.17, $16.56 and $13.65, respectively. The fair value of GESPP options
was based on the 15 percent purchase discount.
NOTE 17. MANAGEMENT STOCK OWNERSHIP PROGRAM
In May 2002, shareholders approved 22.7 million shares for issuance under the
Management Stock Ownership Program (MSOP) in the form of management stock
options, restricted stock and stock appreciation rights. Under the plan, the
company has principally issued management stock options that are granted at
market value at the date of grant. These options generally are exercisable one
year after the date of grant and expire 10 years from the date of grant. Thus,
outstanding shares under option include grants from previous plans. There were
14,210 participants in the plan at December 31, 2002.
71
- -------------------------------------------------------------------------------
Management Stock 2002 2001 2000
Ownership Program --------------- --------------- ---------------
Exercise Exercise Exercise
Shares Price* Shares Price* Shares Price*
- -------------------------------------------------------------------------------
Under option-
Jan. 1 34,550,188 $88.12 32,347,256 $79.34 30,702,415 $74.67
Granted
Annual 6,236,067 128.85 6,541,299 117.25 6,040,196 88.33
Progressive
(Reload) 413,046 122.49 671,285 115.45 572,511 98.33
Exercised (5,505,889) 75.14 (4,826,135) 71.41 (4,684,779) 62.19
Canceled (99,799) 129.00 (183,517) 117.24 (283,087) 86.77
- -------------------------------------------------------------------------------
Dec. 31 35,593,613 $97.55 34,550,188 $88.12 32,347,256 $79.34
- -------------------------------------------------------------------------------
Options exercisable-
Dec. 31 29,022,791 $92.26 27,536,534 $80.98 26,159,345 $77.02
Shares available for grant -
Dec. 31 16,161,176 4,501,427 11,738,624
- -------------------------------------------------------------------------------
*Weighted average
- -------------------------------------------------------------------------------
MSOP Options Outstanding and Exercisable at December 31, 2002
Options Outstanding Options Exercisable
-------------------------------------- ---------------------
Range of Remaining
Exercise Contractual Exercise Exercise
Prices Shares Life (months)* Price* Shares Price*
- ------------------------------------------------------------------------------
$48.27-63.08 6,008,631 35 $57.35 6,008,631 $57.35
86.70-106.95 16,499,727 77 92.49 16,193,060 92.29
111.80-129.70 13,085,255 112 122.76 6,821,100 117.26
- ------------------------------------------------------------------------------
*Weighted average
For annual and progressive (reload) options the weighted average fair value at
date of grant was calculated utilizing the Black-Scholes option-pricing model
and the assumptions that follow.
- -----------------------------------------------------------------------------------------------
Annual Progressive (Reload)
MSOP Assumptions 2002 2001 2000 2002 2001 2000
- -----------------------------------------------------------------------------------------------
Exercise price $129.00 $117.25 $88.33 $122.49 $115.45 $98.33
Risk-free interest rate 4.6% 4.8% 6.7% 2.6% 3.8% 6.3%
Dividend growth rate (5 year average) 3.2% 4.6% 4.3% 3.2% 4.6% 4.3%
Volatility 25.0% 24.1% 22.3% 24.1% 23.7% 25.4%
Expected life (months) 66 67 68 28 28 28
Black-Scholes fair value $ 33.51 $ 29.41 $22.45 $ 17.81 $ 17.62 $17.18
- -----------------------------------------------------------------------------------------------
Certain MSOP average options outstanding during the years 2002, 2001 and 2000
(5.5, 4.2 and 11.5 million shares, respectively) were not included in the
computation of diluted earnings per share because they would not have had a
dilutive effect. The tax benefit charged directly to equity for employee stock
options was $77 million in 2002, $57 million in 2001 and $55 million in 2000.
Refer to Note 1 in the Consolidated Financial Statements for the impact of
stock-based compensation on pro forma net income and earnings per share for
both the GESPP and MSOP.
72
The computations for basic and diluted earnings per share for each year follow.
- ---------------------------------------------------------------------------
Earnings Per Share
(Amounts in millions, except per share amounts) 2002 2001 2000
- ---------------------------------------------------------------------------
Numerator:
Net income $1,974 $1,430 $1,782
- ---------------------------------------------------------------------------
Denominator:
Denominator for weighted average common
shares outstanding - basic 390.0 394.3 395.7
Dilution associated with the company's
stock based compensation plans 5.5 5.6 4.2
- ---------------------------------------------------------------------------
Denominator for weighted average common
shares outstanding - diluted 395.5 399.9 399.9
- ---------------------------------------------------------------------------
Earnings per share - basic $5.06 $3.63 $4.50
Earnings per share - diluted 4.99 3.58 4.45
- ---------------------------------------------------------------------------
NOTE 18. COMMITMENTS AND CONTINGENCIES
Operating Leases:
Rental expense under operating leases was $122 million in 2002 and $119
million in both 2001 and 2000. Minimum lease payments under operating leases
with non-cancelable terms in excess of one year, as of December 31, 2002,
follows.
- --------------------------------------------------------------------
Operating Leases
After
(Millions) 2003 2004 2005 2006 2007 2007 Total
- --------------------------------------------------------------------
Minimum lease
payments $71 $52 $34 $25 $19 $82 $283
- --------------------------------------------------------------------
Capital Leases:
No material capital lease agreements are effective as of December 31, 2002 and
2001. Therefore, there are no material capital lease assets or capital lease
obligations. However, 3M has entered into a license agreement involving a
building in the United Kingdom. The lease portion of the agreement, effective
in April 2003, qualifies for capital lease accounting treatment. During the
second quarter of 2003, 3M will record a capital lease asset and obligation in
the amount of approximately $54 million.
Minimum lease payments under capital leases, including the above-mentioned
2003 capital lease, with non-cancelable terms in excess of one year, as of
December 31, 2002, follows.
- -------------------------------------------------------------------
Capital Leases
After
(Millions) 2003 2004 2005 2006 2007 2007 Total
- -------------------------------------------------------------------
Minimum lease
payments $4 $4 $4 $4 $4 $91 $111
- -------------------------------------------------------------------
Guarantees:
3M's guarantees of loans with third parties, indemnification contracts, and
other guarantees are estimated at approximately $25 million. 3M's accrued
product warranty liability is also estimated at approximately $25 million.
73
Related Party Activity:
3M sales to related parties and indebtedness to 3M from related parties is not
significant. Purchases from related parties (largely related to companies in
which 3M has an equity interest) totaled approximately $87 million. Receivables
due from employees for relocation and other ordinary business expense advances
are approximately $25 million.
Legal Proceedings:
Discussion of legal matters is incorporated by reference from Part I, Item 3,
Legal Proceedings, of this Annual Report on Form 10-K, and should be considered
an integral part of the Consolidated Financial Statements and Notes.
NOTE 19. QUARTERLY DATA (Unaudited)
- -----------------------------------------------------------------------------
(Millions, except per-share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------
Net sales
2002 $ 3,890 $ 4,161 $ 4,143 $ 4,138 $16,332
2001 4,164 4,073 3,961 3,856 16,054
- -----------------------------------------------------------------------------
Cost of sales*
2002 $ 2,036 $ 2,231 $ 2,115 $ 2,114 $ 8,496
2001 2,196 2,266 2,156 2,131 8,749
- -----------------------------------------------------------------------------
Net income*
2002 $ 452 $ 466 $ 545 $ 511 $ 1,974
2001 453 202 394 381 1,430
- -----------------------------------------------------------------------------
Basic earnings per share - net income*
2002 $ 1.16 $ 1.19 $ 1.40 $ 1.31 $ 5.06
2001 1.14 .51 1.00 .97 3.63
- -----------------------------------------------------------------------------
Diluted earnings per share - net income*
2002 $ 1.14 $ 1.18 $ 1.38 $ 1.29 $ 4.99
2001 1.13 .50 .99 .96 3.58
- -----------------------------------------------------------------------------
*In 2002, the adoption of a new accounting standard resulting in the cessation
of goodwill amortization and other indefinite-lived intangible asset
amortization increased net income by 12 cents per diluted share. 2002 and 2001
results include non-recurring items primarily related to the 2001 restructuring
plan. Non-recurring items increased cost of sales for the second quarter of
2002 ($91 million), first quarter of 2002 ($30 million), fourth quarter of 2001
($61 million), third quarter of 2001 ($47 million), second quarter of 2001
($141 million), and first quarter of 2001 ($23 million). Non-recurring items
decreased net income and diluted earnings per share for the second quarter of
2002 ($73 million, or $.18 per diluted share), first quarter of 2002 ($35
million, or $.09 per diluted share), fourth quarter of 2001 ($6 million, or
$.02 per diluted share), third quarter of 2001 ($43 million, or $.11 per
diluted share), second quarter of 2001 ($249 million, or $.62 per diluted
share) and first quarter of 2001 ($14 million, or $.03 per diluted share).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information
relating to directors and nominees of 3M is set forth under the caption
"Proposal No. 1 - Election of Directors" in 3M's proxy statement for its 2003
annual meeting of stockholders ("3M Proxy Statement") and is incorporated by
reference herein. Information about executive officers is included in Item 1
of this Annual Report on Form 10-K.
74
ITEM 11. EXECUTIVE COMPENSATION. The information relating to executive
compensation is set forth under the captions "Summary Compensation Table,"
"Option Grants in Last Fiscal Year," "Option Exercises and Year-End Option
Values," "Long-Term Incentive Plan Awards," "Employment Contract, Termination
of Employment and Change-in-Control Arrangements," "Retirement Benefits," and
"Compensation of Non-Employee Directors" in 3M's Proxy Statement and such
information is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The
information relating to security ownership of certain beneficial owners and
management is set forth under the caption "Beneficial Ownership Table" in 3M's
Proxy Statement and such information is incorporated by reference herein.
Equity compensation plans information follows.
- ---------------------------------------------------------------------------------------
Equity Compensation Plans Information
A B C
Plan Category Number of Weighted- Number of securities
securities to be average exercise remaining available for
issued upon price of future issuance under
exercise of outstanding equity compensation
outstanding options, warrants plans (excluding
options, warrants and rights securities reflected in
and rights column (A)
- ---------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders
MSOP 35,593,613 $97.55 16,161,176
GESPP -- -- 8,632,495
Non-employee
directors -- -- 299,509
- ---------------------------------------------------------------------------------------
Subtotal 35,593,613 97.55 25,093,180
- ---------------------------------------------------------------------------------------
Equity compensation
plans not approved by
security holders -- -- --
- ---------------------------------------------------------------------------------------
Total 35,593,613 $97.55 25,093,180
- ---------------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. No matters require
disclosure here.
The registrant will file with the Commission a definitive proxy statement
pursuant to Regulation 14A by April 30, 2003.
ITEM 14. CONTROLS AND PROCEDURES
a. Within the 90 days prior to the filing date of this annual report, the
company carried out an evaluation, under the supervision and with the
participation of the company's management, including the company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the company (including its consolidated
subsidiaries) required to be included in the company's periodic SEC filings.
b. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls
subsequent to the date the Company carried out this evaluation.
75
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The consolidated financial statements filed as part of this report are
listed in the index to financial statements on page 38.
All financial statement schedules are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the consolidated financial statements or the notes thereto.
(b) Reports on Form 8-K:
3M filed a Form 8-K on March 4, 2003. 3M filed Form 8-K's for the fourth
quarter of 2002 on November 15, 2002 and December 9, 2002.
The Form 8-K dated March 4, 2003, provides the certificate of incorporation as
amended as of April 8, 2002. The amendment reflects the change in the
company's name from Minnesota Mining and Manufacturing Company to 3M Company.
The Form 8-K dated November 15, 2002, contained press releases in connection
with the sale of the company's 30-year zero-coupon senior convertible notes.
The Form 8-K dated December 9, 2002, provided the company's amended Bylaws.
(c) Exhibit Index:
Incorporated by Reference:
Incorporated by Reference in the
Report From
--------------------------------
(3.1) Certificate of incorporation, Form 8-K dated
as amended as of April 8, 2002. March 4, 2003.
(3.2) Bylaws, as amended as of November 11, 2002. Form 8-K dated
December 9, 2002.
(4) Instruments defining the rights of security
holders, including debentures:
(4.1) common stock. Registration No. 333-98163
on Form S-3/A filed on
February 4, 2003.
Registration No. 333-49830
on Form S-4/A filed on
January 11, 2001.
Registration No. 333-42660
on Form S-3/A filed on
August 18, 2000.
(4.2) debt securities. Registration No. 333-103234
on Form S-3 filed on
February 14, 2003.
Form 8-K dated December 7,
2000 and Registration No.
333-48922 on Form S-3/A
filed on January 12, 2001.
76
(c) Exhibit Index (continued):
Incorporated by Reference in the
Report From
--------------------------------
(10) Material contracts, management
remuneration:
(10.1) management stock ownership program. Exhibit 4 of Registration
No. 333-101751 on Form S-8
filed on December 10, 2002.
Registration No. 333-101727
on Form S-8 filed on
December 9, 2002.
Exhibit 4 of Registration
No. 333-30689 on Form S-8
filed on July 2, 1997.
(10.2) profit sharing plan, performance Written description contained
unit plan and other compensation in issuer's proxy statement
arrangements. for the 2003 annual
shareholders' meeting.
(10.3) director stock ownership program. Exhibit 4 of Registration
Statement No. 333-44692
on Form S-8 filed on
August 29, 2000.
(10.4) deferred compensation obligations. Registration No. 333-73192
on Form S-8 filed on
November 13, 2001.
Submitted electronically to the SEC as part of this filing:
(10) Employment agreement dated November 19, 2002, between Registrant
and Richard F. Ziegler.
(12) Calculation of ratio of earnings to fixed charges.
(21) Subsidiaries of the registrant.
(23) Consent of independent auditors.
(24) Power of attorney.
(99.1) Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
(99.2) Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of l934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
3M COMPANY
By /s/ Patrick D. Campbell
-------------------------
Patrick D. Campbell,
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
March 10, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 10, 2003.
Signature Title
W. James McNerney, Jr. Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer
and Director)
Linda G. Alvarado Director
Edward A. Brennan Director
Vance D. Coffman Director
Edward M. Liddy Director
Ronald S. Morrison Director
Ronald G. Nelson Vice President and Controller
Aulana L. Peters Director
Rozanne L. Ridgway Director
Kevin W. Sharer Director
Louis W. Sullivan Director
Patrick D. Campbell, by signing his name hereto, does hereby sign this document
pursuant to powers of attorney duly executed by the other persons named, filed
with the Securities and Exchange Commission on behalf of such other persons,
all in the capacities and on the date stated, such persons constituting a
majority of the directors of the company.
By /s/ Patrick D. Campbell
-------------------------------------
Patrick D. Campbell, Attorney-in-Fact
78
Sarbanes-Oxley Section 302 Certification
I, W. James McNerney, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of 3M Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 10, 2003
/s/ W. James McNerney, Jr.
- -----------------------------
W. James McNerney, Jr.
Chief Executive Officer
79
Sarbanes-Oxley Section 302 Certification
I, Patrick D. Campbell, certify that:
1. I have reviewed this annual report on Form 10-K of 3M Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 10, 2003
/s/ Patrick D. Campbell
- ---------------------------
Patrick D. Campbell
Chief Financial Officer