UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended June 30, 1996 Commission file number: 1-3285
MINNESOTA MINING AND MANUFACTURING COMPANY
State of Incorporation: Delaware
I.R.S. Employer Identification No. 41-0417775
Executive offices: 3M Center, St. Paul, Minnesota 55144
Telephone number: (612) 733-1110
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
On June 30, 1996, there were 419,166,853 shares of the Registrant's common
stock outstanding.
This document contains 26 pages.
The exhibit index is set forth on page 22.
MINNESOTA MINING AND MANUFACTURING COMPANY
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF INCOME
(Amounts in millions, except per-share amounts)
(Unaudited)
Three months ended Six months ended
June 30 June 30
1996 1995 1996 1995
Net Sales $3,522 $3,424 $6,990 $6,785
Operating Expenses
Cost of goods sold 1,986 1,949 3,976 3,835
Selling, general and
administrative expenses 908 889 1,790 1,749
Total 2,894 2,838 5,766 5,584
Operating Income 628 586 1,224 1,201
Other Income and Expense
Interest expense 15 26 32 53
Investment and other
income - net (18) (25) (37) (35)
Total (3) 1 (5) 18
Income From Continuing
Operations Before Income
Taxes and Minority Interest 631 585 1,229 1,183
Provision for Income Taxes 231 217 449 439
Minority Interest 19 22 37 43
Income From Continuing
Operations 381 346 743 701
Discontinued Operations,
Net of Income Taxes -- 7 -- 28
Net Income $ 381 $ 353 $ 743 $ 729
Average Shares Outstanding 418.9 420.2 418.7 420.0
Per-Share Amounts:
Continuing Operations $ .91 $ .82 $ 1.78 $ 1.67
Discontinued Operations -- .02 -- .07
Net Income $ .91 $ .84 $ 1.78 $ 1.74
Cash dividends declared
and paid $ .47 $ .47 $ .94 $ .94
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
MINNESOTA MINING AND MANUFACTURING COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
June 30,
ASSETS 1996 December 31,
Current Assets (Unaudited) 1995
Cash and cash equivalents $ 633 $ 485
Other securities 184 287
Accounts receivable - net 2,613 2,398
Inventories
Finished goods 1,107 1,164
Work in process 552 565
Raw materials and supplies 477 477
Total inventories 2,136 2,206
Other current assets 1,076 1,019
Total current assets 6,642 6,395
Investments 580 565
Property, Plant and Equipment 11,408 11,234
Less accumulated depreciation (6,794) (6,596)
Property, plant and equipment - net 4,614 4,638
Other Assets 1,258 1,177
Net Assets of Discontinued Operations 117 1,408
Total $13,211 $14,183
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 828 $ 762
Payroll 347 298
Income taxes 271 214
Short-term debt 1,118 822
Other current liabilities 1,416 1,628
Total current liabilities 3,980 3,724
Other Liabilities 2,455 2,372
Long-Term Debt 681 1,203
Stockholders' Equity
Common stock, no par, 472,016,528 shares issued 296 296
Retained earnings 8,370 9,164
Unearned compensation - ESOP (424) (437)
Cumulative translation - net (154) (102)
Net unrealized gains - debt & equity securities 28 16
Less cost of treasury stock -
June 30, 1996, 52,849,675 shares;
December 31, 1995, 53,313,774 shares (2,021) (2,053)
Stockholders' Equity - net 6,095 6,884
Total $13,211 $14,183
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
MINNESOTA MINING AND MANUFACTURING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Six months ended
June 30
1996 1995
Cash Flows from Operating Activities:
Net income $ 743 $ 729
Less income from discontinued operations -- 28
Income from continuing operations 743 701
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities:
Implant litigation - net (175) (8)
Depreciation and amortization 440 426
Working capital and other changes (93) (113)
Net cash provided by continuing operations 915 1,006
Net cash provided by discontinued operations 135 61
Net cash provided by operating activities 1,050 1,067
Cash Flows from Investing Activities:
Capital expenditures (487) (543)
Other changes 39 16
Discontinued operations, net (62) (104)
Net cash used in investing activities (510) (631)
Cash Flows from Financing Activities:
Net change in short-term debt (51) 63
Repayment of long-term debt (5) (147)
Proceeds from long-term debt 1 218
Purchases of treasury stock (193) (124)
Reissuances of treasury stock 156 111
Payment of dividends (394) (395)
Discontinued operations 65 --
Net cash used in financing activities (421) (274)
Effect of exchange rate changes on cash 29 (62)
Net increase in cash and cash equivalents 148 100
Cash and cash equivalents at beginning of year 485 297
Cash and cash equivalents at end of period $ 633 $ 397
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
MINNESOTA MINING AND MANUFACTURING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair presentation
of financial position, results of operations and cash flows for the
periods presented. These adjustments consist of normal, recurring
items. The results of operations for any interim period are not
necessarily indicative of results for the full year. The condensed
consolidated financial statements and notes are presented as
permitted by the requirements for Form 10-Q and do not contain
certain information included in the company's annual consolidated
financial statements and notes. This Form 10-Q should be read in
conjunction with the company's consolidated financial statements and
notes included in its 1995 Annual Report on Form 10-K.
Discontinued Operations:
In November 1995, the Board of Directors approved a plan to launch
the company's data storage and imaging systems businesses as an
independent, publicly owned company, and also approved the
discontinuance of 3M's audio and video tape business. In June 1996,
the Board of Directors approved the distribution by 3M of the common
stock of Imation Corp. (the newly formed company to which 3M
contributed the net assets of its data storage and imaging systems
businesses) to shareholders pursuant to a Transfer and Distribution
Agreement, dated as of June 18, 1996. The tax-free distribution was
effected in early July, 1996, as a special dividend of one share of
Imation common stock for every 10 shares of outstanding 3M common
stock held of record as of the close of business on June 28, 1996.
The company recorded the special dividend of Imation common stock to
its stockholders as of the record date by reducing retained earnings
by $1.075 billion which represents the recorded carrying value of the
net assets underlying the common stock distributed. The amount of
the special dividend may be adjusted based upon the final
determination of the net asset amounts distributed. In connection
with the distribution and capitalization of Imation Corp., the
company recorded cash proceeds of $65 million and transferred
approximately $65 million of short-term debt to Imation Corp. as of
June 30, 1996.
As a result of the plans to spin off Imation and to discontinue the
audio and video tape business, the company's consolidated financial
statements and notes report these businesses as discontinued
operations. Prior periods' consolidated financial statements and
notes have been restated accordingly. Net sales of the discontinued
businesses for the first six months of 1995 were $1.437 billion.
Results of operations of the discontinued businesses for the first
six months of 1996 are not reflected in 3M's income statement because
the expected income from these operations through the estimated date
of spin-off or closure was reflected in the loss on disposal of
discontinued operations recorded in the fourth quarter of 1995.
Restructuring:
Related to the spin-off of Imation and the phase-out of the audio and
video tape business, the company recorded a restructuring charge of
$79 million in the fourth quarter of 1995. Major components of this
charge included $50 million of employee severance costs and $17
million related to the write-down of certain assets to their net
realizable value. The company expects to reduce approximately 1,000
positions by the end of 1996, mainly in corporate service functions
supporting 3M businesses in the United States and Europe. As of June
30, 1996, about half of these positions had been eliminated, with
many of these reductions coming at the end of June. An additional
500 people in continuing operations have committed to leave toward
the end of this year. About $12 million in cash payments related to
employee separations have been made through June 30, 1996. The
remaining liability of $49 million for employee separations and other
items is included in other current liabilities.
Other:
Discussion of legal matters is cross-referenced to this Form 10-Q,
Part II, Item 1, Legal Proceedings, and should be considered an
integral part of the Consolidated Financial Statements and Notes.
Coopers & Lybrand L.L.P., the company's independent accountants, have
performed a review of the unaudited interim financial statements
included herein and their report thereon accompanies this filing.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Minnesota Mining and Manufacturing Company:
We have reviewed the accompanying condensed consolidated balance
sheet of Minnesota Mining and Manufacturing Company and Subsidiaries
as of June 30, 1996, and the related condensed consolidated
statements of income for the three-month and six-month periods ended
June 30, 1996 and 1995, and cash flows for the six-month periods
ended June 30, 1996 and 1995. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the condensed consolidated financial
statements referred to above for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31,
1995, and the related consolidated statements of income and cash
flows for the year then ended (not presented herein); and in our
report dated February 12, 1996, we expressed an unqualified opinion
on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1995, is fairly stated in all
material respects in relation to the consolidated balance sheet from
which it has been derived.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
St. Paul, Minnesota
July 29, 1996
MINNESOTA MINING AND MANUFACTURING COMPANY
AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Second Quarter
On November 14, 1995, 3M announced the launch of its data storage and
imaging systems businesses as an independent, publicly owned company,
named Imation Corp. This launch took place on July 1, 1996. 3M also
announced that it will discontinue its audio and video tape business.
As discussed in the Notes to Consolidated Financial Statements all
activity related to the distribution and capitalization of Imation
Corp. has been reflected in the financial statements as of June 30,
1996. The data storage, imaging systems, and audio and video tape
businesses are presented as discontinued operations within the
financial statements and notes for all periods presented. The
following discussion is on a continuing operations basis.
Worldwide sales for the second quarter totaled $3.522 billion, an
increase of 2.9 percent from $3.424 billion in the second quarter
last year. Excluding changes in currency exchange rates, sales rose
about 7 percent. Unit sales increased about 6 percent, while selling
prices were up about 1 percent.
In the United States, sales were up about 7 percent to $1.652
billion. Volume rose about 5 percent, outpacing the growth of the
markets 3M serves. Selling prices in the United States were up about
2 percent, continuing a positive trend. In the Life Sciences Sector,
sales increased about 4.5 percent, all due to volume. Pacing this
revenue growth were drug-delivery systems, commercial graphics,
diaper tapes, dental products, and safety and security systems. Life
Sciences' overall growth was held back by softness in medical
products. In the Industrial and Consumer Sector, sales were up about
8.5 percent. Volume was up nearly 6 percent, nearly double the
growth of the United States industrial production on a year-over-year
basis. Selling prices rose about 2.5 percent. Good sales gains were
achieved throughout this sector, with gains particularly strong in
the automotive and chemical markets, and in the consumer and office
markets.
Internationally, volume increased about 7 percent and selling prices
were up about 1 percent. The two business sectors contributed about
equally to the international local currency sales gain for the
quarter. Currency translation reduced international sales by about 8
percent.
In Japan, 3M's largest international company, unit sales rose about
11 percent. This gain was driven by an exceptionally strong flow of
new products tailored for the Japanese market and a pickup in the
Japanese economy. In Asia outside Japan, volume was up about 15
percent, with overall growth constrained by the slower pace of growth
in the Chinese economic area of Hong Kong, Taiwan, and mainland
China. In Latin America, unit sales increased more than 20 percent.
The company continued to see a good rebound in business in Mexico, as
well as strong volume gains in most other Latin America countries.
In Europe, volume increased about 3 percent. This gain, similar to
first quarter, was affected by continued sluggishness in major
European economies. In Canada, volume decreased about 3 percent.
Cost of goods sold, which includes manufacturing, research and
development, and engineering, was 56.3 percent of sales, down more
than half a percentage point from the second quarter last year, and
down more than a full point from this year's first quarter. Cost of
goods sold benefited from volume, pricing, productivity and from raw
materials. Raw material costs, after increasing sharply in recent
quarters, declined slightly this quarter. Changes in currency
exchange rates reduced gross margins by about three-tenths of a
percentage point. This effect relates to the purchases made by the
international companies from 3M in the United States. Research and
development spending was 6.8 percent of sales, up one-tenth of a
point from the second quarter last year.
Selling, general and administrative spending was 25.8 percent of
sales, down two-tenths of a point from the same quarter last year.
This rate of SG&A spending was somewhat higher than in the past three
quarters. During the second quarter special advertising and
promotions related to new products temporarily elevated the rate of
SG&A spending.
Employment decreased by about 710 people when compared with the
second quarter last year, with sales per employee up more than 8
percent in local currencies. This followed a 7 percent gain for total
year 1995.
Operating income was $628 million, up more than 7 percent from the
second quarter last year. In the United States, the company
leveraged the sales gain very well, with operating income increasing
17 percent. Internationally, profits showed a solid increase in
local currencies, but were basically flat as reported in dollars.
Currency reduced international operating income by about $33 million
dollars, or nearly 10 percent. Worldwide operating income was 17.9
percent of sales, up eight-tenths of a point from the second quarter
last year, and up seven-tenths of a point from this year's first
quarter. Margins were the highest in five quarters. In the United
States, operating income was 17.2 percent of sales, up 1.5 percentage
points from the same quarter last year, and up more than 2.5
percentage points from the first quarter. Internationally, operating
income was 18.4 percent of sales, up slightly from the same quarter
last year. Both business sectors contributed to the worldwide
increase in profits, as well as to the improvement in margins.
Second quarter interest expense of $15 million was down $11 million
from the same quarter last year. Interest expense declined due to
several factors, including lower interest rates, and a reduction in
debt. Investment and other income was $18 million, down $7 million
from the second quarter last year. The second quarter last year
included benefits from currency and investment gains.
Income from continuing operations totaled $381 million, or $.91 per
share, with per-share income up 11 percent from the second quarter of
1995. The company estimates that changes in the value of the U.S.
dollar decreased earnings for the quarter by about 4 cents per share
compared to the second quarter of 1995. This estimate includes the
effect of translating profits from local currencies into United
States dollars, the costs in local currencies of transferring goods
between the parent company in the United States and international
companies, and transaction gains and losses in countries not
considered to be highly inflationary.
Year-to-date
On a year-to-date basis, worldwide sales totaled $6.990 billion, an
increase of 3.0 percent from $6.785 billion in the first six months
of last year. Excluding changes in currency exchange rates, sales
rose about 7 percent. Unit sales increased about 5 percent, while
selling prices were up about 2 percent.
In the United States, sales were up about 5 percent to $3.218
billion. Volume rose about 3 percent, while selling prices were up
about 2 percent, continuing a positive trend. In the Life Sciences
Sector, sales increased 4.3 percent, largely due to volume. Prices
were up about five-tenths of a percent. In the Industrial and
Consumer Sector, sales were up 5.1 percent. Volume was up about 2
percent, while selling prices rose about 3 percent.
Internationally, sales volume increased about 7 percent and selling
prices were up about 1 percent. The two business sectors contributed
about equally to the international local currency sales gain.
Currency translation reduced international sales by about 6 percent.
Cost of goods sold, which includes manufacturing, research and
development, and engineering, was 56.9 percent of sales, up four-
tenths of a percentage point from the first six months of last year.
Cost of goods sold benefited from volume, pricing, and productivity,
but was penalized by higher material prices. Research and
development spending was 6.7 percent of sales, up two-tenths of a
point from the first six months of last year.
Selling, general and administrative spending was 25.6 percent of
sales, down two-tenths of a point from the first six months of last
year.
Operating income was $1.224 billion, up about 2 percent from the
first six months of last year. In the United States profits
increased about 3 percent. Internationally, profits showed a solid
increase in local currencies, but were only up 1 percent as reported
in dollars. Currency reduced international operating income by
nearly $50 million dollars, or about 7 percent. Both business
sectors contributed to the worldwide increase in profits.
Interest expense of $32 million was down $21 million from the first
six months of last year. Interest expense declined due to several
factors, including lower interest rates, and a reduction in debt.
Investment and other income was $37 million, up $2 million from the
first six months of last year.
The worldwide effective tax rate was 36.5 percent of pre-tax income,
the same as in the first quarter of this year. The company continued
to effectively utilize its international tax credits.
Income from continuing operations totaled $743 million, or $1.78 per
share, with per-share income up 6.6 percent from the first six months
of 1996. The company estimates that changes in the value of the U.S.
dollar decreased earnings for the first six months by about 6 cents
per share compared to the same period of 1995. This estimate
includes the effect of translating profits from local currencies into
United States dollars, the costs in local currencies of transferring
goods between the parent company in the United States and
international companies, and transaction gains and losses in
countries not considered to be highly inflationary.
As discussed in this Form 10-Q, Part II, Item 1, Legal Proceedings,
mammary implant litigation resulted in a pre-tax charge of $35
million ($22 million after tax) in the first quarter of 1994. There
can be no certainty that the company may not ultimately incur
charges, whether for governmental proceedings and claims, products
liability claims, environmental proceedings or other actions, in
excess of presently established accruals. While such future charges
could have a material adverse impact on the company's net income in
the quarterly period in which they are recorded, the company believes
that such additional charges, if any, will not have a material
adverse effect on the consolidated financial position or annual
results of operations of the company.
****
As a result of the restructuring, 3M will be better positioned for
profitable growth. 3M expects solid sales and earnings growth in
1996, despite strengthening of the U.S. dollar. The company expects
to benefit from new products, intensified customer-satisfaction
efforts, and on-going productivity improvement.
While volume, productivity and selling prices are expected to help
1996 results, currency effects will moderate profit growth. Based on
current exchange rates, currency effects in the second half could be
similar to what was experienced in the first six months of this year.
Raw material costs are expected to be down slightly for 1996 as a
whole.
Capital spending, which was up 12 percent in 1995, is expected to
increase about 5 percent in 1996.
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity remain strong.
Working capital decreased $9 million to $2.662 billion from $2.671
billion as of December 31, 1995. The accounts receivable average
days' sales outstanding was 63 days, down one day from the same
quarter last year and from year-end 1995. The company's key
inventory index was down 5 percent from year-end, and is now at 3.7,
which represents the number of months of inventory. The company's
current ratio was 1.7, unchanged from year-end.
Total debt decreased $226 million from year-end 1995 to $1.799
billion. Long-term debt decreased more than $500 million from year-end
1995 due to the reclassification of certain Eurobond and other debt
due in 1997 to short-term debt. The company's borrowings continue to
maintain AAA long-term ratings. As of June 30, 1996, total debt was
30 percent of stockholders' equity, basically unchanged from 29 percent
at year-end. Stockholders' equity at June 30, 1996 was reduced by
about $1 billion due to the Imation spin-off, essentially representing
the distribution of the net assets of Imation.
Return on average stockholders' equity for the first six months was
24.4 percent, meeting the company's goal of 20 to 25 percent. Return
on capital employed for the first six months was 25.0 percent, up
from 24.8 percent in the comparable 1995 period. The company's goal
is 27 percent or better.
Net cash provided by operating activities from continuing operations
totaled $915 million in the first six months of the year, down $91
million from the same period last year. This decrease was primarily
due to the $175 million net cash outflow related to mammary implant
litigation. Net cash provided by operating activities from
discontinued operations was $135 million in the first six months
compared with $61 million in the same period last year. This
increase of $74 million was primarily due to lower working capital
requirements.
Timing differences between payment of implant liabilities and receipt
of related insurance recoveries could affect the cash flows of future
periods. The amount and timing of prospective payments and receipts
cannot be determined with precision at this time. In January 1996,
the company paid $130 million into a court administered fund as an
initial reserve against costs of claims payable by the company under
the "Revised Settlement Program," which is discussed in the legal
proceedings section in Part II, Item 1, of this Form 10-Q. As a
result of actions associated with discontinued operations and
restructuring, the company will have unusually high severance
payments in 1996. 3M believes that these timing differences and
higher severance payments will not have a material adverse effect on
the consolidated financial position or liquidity of the company.
Cash used in investing activities was $510 million in the first six
months of the year, down $121 million from the same period last year.
Capital expenditures for the first six months of 1996 for continuing
operations were $487 million, a decrease of about 10 percent compared
with the same period last year.
Financing activities in both short-term and long-term debt had net
cash outflows of $55 million, compared to inflows of $134 million in
the first six months of last year. Treasury stock repurchases were
$193 million, compared with repurchases in the same period last year
of $124 million.
The company repurchased about 2.9 million shares of treasury stock in
the first six months of this year, compared with 2.2 million shares
in the same period last year. On February 12, 1996, the Board of
Directors authorized the repurchase of up to 6 million shares of 3M
common stock through February 10, 1997. As of June 30, 1996, 3.9
million shares remained authorized for repurchase. Stock repurchases
are made to support employee stock purchase plans and for other
corporate purposes.
In the first two quarters of 1996 the quarterly dividend on 3M common
stock was 47 cents a share, the same as the quarterly rate for 1995.
Dividends paid remained virtually unchanged at $394 million in the
first six months of this year as compared to $395 million in the same
period last year. On June 19, 1996, the 3M Board of Directors
announced the dividend will be increased from 47 cents a share to 49
cents a share, effective with the third-quarter dividend payable on
September 12, 1996, to stockholders of record on August 23, 1996.
The company expects cash generated by operating activities will
support its primary growth initiatives, with ample borrowing capacity
and lines of credit available to supplement cash flows from
operations. 3M maintains a shelf registration with the Securities
and Exchange Commission that provides the means to offer medium-term
notes not to exceed $601 million. As of June 30, 1996, $402 million
of the shelf registration was available for future financial needs.
MINNESOTA MINING AND MANUFACTURING COMPANY
AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The company and certain of its subsidiaries are named as defendants
in a number of actions, governmental proceedings and claims,
including environmental proceedings, and products liability claims
involving products now or formerly manufactured and sold by the
company. In some actions, the claimants seek damages as well as
other relief which, if granted, would require substantial
expenditures. The company has accrued certain liabilities which
represent reasonable estimates of its probable liabilities for these
matters. The company also has recorded receivables for the probable
amount of insurance recoverable with respect to these matters.
Some of these matters raise difficult and complex factual and legal
issues, and are subject to many uncertainties, including, but not
limited to, the facts and circumstances of each particular action,
the jurisdiction and forum in which each action is proceeding and
differences in applicable law. Accordingly, the company is not
always able to estimate the amount of future liabilities with
respect to such matters.
There can be no certainty that the company may not ultimately incur
charges, whether for governmental proceedings and claims, products
liability claims, environmental proceedings or other actions, in
excess of presently established accruals. While such future charges
could have a material adverse impact on the company's net income in
the quarterly period in which they are recorded, the company
believes that such additional charges, if any, will not have a
material adverse effect on the consolidated financial position or
annual results of operations of the company.
Breast Implant Litigation
As of June 30, 1996, the company had been named as a defendant,
often with multiple co-defendants, in 6,862 claims and lawsuits in
various courts, all seeking damages for personal injuries from
allegedly defective breast implants. These claims and lawsuits
purport to represent approximately 19,778 individual claimants. It
is not yet certain how many of these lawsuits and claims involve
products manufactured and sold by the company, as opposed to other
manufacturers. The company entered the business of manufacturing
breast implants in 1977 by purchasing McGhan Medical Corporation.
In 1984, the company sold the business to a corporation that was
also named McGhan Medical Corporation.
The typical claim or lawsuit alleges that the individual's breast
implants caused one or more of a wide variety of ailments,
including, but not limited to, non-specific autoimmune disease,
scleroderma, lupus, rheumatoid arthritis, fibromyalgia, mixed
connective tissue disease, Sjogren's Syndrome, dermatomyositis,
polymyositis, and chronic fatigue.
Plaintiffs in these cases typically seek monetary damages, often in
unspecified amounts, and also seek certain types of equitable
relief, including requiring the company to fund the costs associated
with removal of the breast implants, to fund medical research into
the ailments allegedly caused by silicone gel breast implants and to
fund periodic medical checkups.
A number of breast implant claims and lawsuits seek to impose
liability on the company under various theories for personal
injuries allegedly caused by breast implants manufactured and sold
by manufacturers other than the company, including, but not limited
to, McGhan Medical Corporation and manufacturers that are no longer
in business or that are insolvent, whose breast implants may or may
not have been used in conjunction with implants manufactured and
sold by the company. These claims raise many difficult and complex
factual and legal issues that are subject to many uncertainties,
including the facts and circumstances of each particular claim, the
jurisdiction in which each suit is brought, differences in
applicable law and insurance coverage.
A number of breast implant lawsuits seek to recover punitive
damages. Any such punitive damages that may be awarded against the
company may or may not be covered by some insurance policies
depending on the language of the insurance policy, applicable law
and agreements with insurers.
In addition to the individual suits against the company, a class
action on behalf of all women with breast implants filed against all
manufacturers of such implants has been conditionally certified and
is pending in the United States District Court for the Northern
District of Alabama (the "Court")(DANTE, ET AL., V. DOW CORNING, ET
AL., U.S.D.C., N. Dist., Ala., 92-2589; part of IN RE: SILICONE GEL
BREAST IMPLANT PRODUCT LIABILITY LITIGATION, U.S.D.C., N. Dist.
Ala., MDL 926, U.S.D.C., N. Dist. Ala., CV 92-P-10000-S; now held in
abeyance pending settlement proceedings in the settlement class
action LINDSEY, ET AL., V. DOW CORNING CORPORATION, ET AL.,
U.S.D.C., N. Dist., Ala., CV 94-P-11558-S). Class actions, some of
which have been certified, are pending in various state courts,
including, among others, Louisiana, Florida and Illinois, and in the
British Columbia courts in Canada.
The company has also been served with a purported class action
brought on behalf of children allegedly exposed to silicone in utero
and through breast milk. (FEUER, ET AL., V. MCGHAN, ET AL.,
U.S.D.C., E. Dist. NY, 93-0146.) The suit names all breast implant
manufacturers as defendants and seeks to establish a medical
monitoring fund.
On December 22, 1995, the Court approved a revised class action
settlement program for resolution of claims seeking damages for
personal injuries from allegedly defective breast implants (the
"Revised Settlement Program"). The Revised Settlement Program is a
revision of a previous settlement pursuant to a Breast Implant
Litigation Settlement Agreement (the "Settlement Agreement") reached
on April 8, 1994, and approved by the Court on September 1, 1994.
Under the terms of the previous Settlement Agreement, the company
and other defendants agreed to make total contributions in the
amount of $4.25 billion, including the company's maximum commitment
of $325 million, which was to be paid into a court-administered fund
within three years from the date that the final order ratifying the
Settlement Agreement was entered and after appeals had been
exhausted. On May 1, 1995, the Court stated that preliminary
information from claims filed prior to the September 1994 deadline
for current claims had led the Court to believe that the total
amount of current claims likely to be approved would substantially
exceed the portion of the Settlement Agreement allocated to current
claims. The Settlement Agreement provided, in that case, for a
reduction in the amount to be paid to individual claimants, but
first obligated the parties to attempt to adjust the Settlement
Agreement. After the parties were unable to reach agreement, the
Court approved the Revised Settlement Program for presentation to
eligible class members.
The Court has ordered that, beginning after November 30, 1995,
members of the plaintiff class will be able to choose whether they
will participate in the Revised Settlement Program or will opt out,
which would then allow them to proceed with separate products
liability actions.
The Revised Settlement Program includes only domestic class members,
and only class members with implants manufactured by certain
manufacturer defendants, including the company and McGhan Medical
Corporation. The company's obligations under the Revised Settlement
Program are limited to eligible claimants with implants manufactured
by the company or its predecessors ("3M implants") or manufactured
only by McGhan Medical Corporation after its divestiture from the
company on August 3, 1984 ("Post 8/84 McGhan implants"). With
respect to claimants with only Post 8/84 McGhan implants (or only
Post 8/84 McGhan implants plus certain other manufacturers'
implants), the benefits are more limited than for claimants with 3M
implants. Such benefits are payable by the company, Union Carbide
Corporation and McGhan Medical Corporation.
In general, the amounts payable to individual current claimants (as
defined in the Court's order) under the Revised Settlement Program,
and the company's obligations to make those payments, will not be
affected by the number of class members electing to opt out of the
Revised Settlement Program or the number of class members making
claims under the Revised Settlement Program. The Revised Settlement
Program provides for two compensation options, in addition to
certain miscellaneous benefits, for current claimants with 3M
implants.
Under the first option, denominated as Fixed Amount Benefits,
current claimants with 3M implants who satisfy disease criteria
established in the prior Settlement Agreement will receive amounts
ranging from $5,000 to $100,000, depending on disease severity or
disability level, whether the claimant can establish that her
implants have ruptured, and whether the claimant also has had
implants manufactured by Dow Corning. Under the second option,
denominated as Long-Term Benefits, current claimants with 3M
implants who satisfy more restrictive disease and severity criteria
specified under the Revised Settlement Program can receive benefits
ranging from $37,500 to $250,000.
In addition, current claimants with 3M implants are eligible for (a)
a one-time payment of $3,000 upon removal of 3M implants during the
course of the class settlement, and (b) an advance payment of $5,000
against the above referenced benefits upon proof of having 3M
implants and upon waiving or not timely exercising the right to opt
out from the Revised Settlement Program. Current claimants with
only Post 8/84 McGhan implants (or only Post 8/84 McGhan implants
plus certain other manufacturers' implants) are eligible only for
benefits ranging from $10,000 to $50,000.
Eligible participants with 3M implants, who did not file current
claims but are able to satisfy the more restrictive disease and
severity criteria during an ongoing period of 15 years, will be
eligible for the Long-Term Benefits, subject to certain funding
limitations. Such participants also will be eligible for an advance
payment of $1,000 upon proof of having 3M implants and upon waiving
or not timely exercising the right to opt out from the Revised
Settlement Program. Benefit levels for eligible participants, who
are not current claimants, with only Post 8/84 McGhan implants (or
only Post 8/84 McGhan implants plus certain other manufacturers'
implants) again will range from $10,000 to $50,000.
The company's obligations to fund Long-Term Benefits for eligible
claimants with 3M implants are cancelable if certain provisions of
the Revised Settlement Program are disapproved on appeal. Pending
appeal the company will pay Long-Term Benefits to eligible claimants
providing it receives appropriate releases. The company's
obligations to fund any benefits for claimants with only Post 8/84
McGhan implants are currently suspended pending appeals and will be
canceled if any of certain provisions are disapproved on appeal. In
either event, the other benefits provided under the Revised
Settlement Program would still be payable to any claimant with 3M
implants who elected to participate in the program.
As of the date of this filing it is still uncertain how many
plaintiffs will choose to participate in the Revised Settlement
Program, or what disease criteria they will satisfy and what options
they will choose, the total amount and timing of the company's
prospective payments under the Revised Settlement Program cannot be
determined with precision at this time. In January 1996, the
company paid $130 million into a court administered fund as an
initial reserve against costs of claims payable by the company under
the Revised Settlement Program.
In the first quarter of 1994, the company took a pre-tax charge of
$35 million ($22 million after tax) in recognition of its then best
estimate of its probable liabilities and associated expenses, net of
the probable amount of insurance recoverable from its carriers. In
the second quarter of 1996, based on additional information
developed in this period, the company increased its estimate of the
minimum probable liabilities and associated expenses to
approximately $991 million. This amount represents the company's
best estimate of the cost and expense of the Revised Settlement
Program and the cost and expense of resolving opt out claims. After
subtracting payments through June 30, 1996 of $420 million (which
includes the January 1996 payment of $130 million under the Revised
Settlement Program) for defense costs and settlements with litigants
and claimants, the company, as of June 30, 1996, had accrued
liabilities of $571 million.
The company has substantial primary and excess products liability
occurrence insurance coverage and claims-made products liability
insurance coverage, which it believes provide coverage for
substantially all of its current exposure for breast implant claims
and defense costs. Most insurers have alleged reservations of rights
to deny all or part of the coverage for differing reasons, including
each insurer's obligations in relation to the other insurers (i.e.
allocation) and which claims trigger both the various occurrence and
claims-made insurance policies. Some insurers have resolved and paid
or committed to their policy obligations. The company believes that
the failure of many insurers to voluntarily perform as promised
subjects them to the company's claims for excess liability and
damages for breach of the insurers' obligation of good faith. Based
on inappropriate non-performance by insurers, it is the opinion of
counsel that insurers have waived all policy term provisions.
On September 22, 1994, three excess coverage occurrence insurers
initiated in the courts of the State of Minnesota a declaratory
judgment action against the company and numerous insurance carriers
seeking adjudication of certain coverage issues and allocation among
insurers. On December 9, 1994, the company initiated an action
against its occurrence insurers in the Texas State Court in and for
Harrison County, seeking a determination of responsibility among the
company's various occurrence insurers having applicable coverages.
Texas is the state with the most implant claims. This action has
since been removed to the U.S. District Court, Eastern District of
Texas, and stayed pending resolution of the litigation in the
Minnesota courts.
The insurers that are parties to these actions generally acknowledge
that they issued products liability insurance to the company and
that breast implant claims are products liability claims. The trial
in Minnesota to resolve the company's insurance coverage and the
financial responsibility of occurrence insurers for breast implant
claims and defense costs began on June 4, 1996.
The occurrence insurers that are parties to the litigation in
Minnesota filed more than thirty motions for summary judgment or
partial summary judgment in mid-October 1995. The insurers, through
these motions, attempt to shift all or a portion of the
responsibility for those claims that the company believes fall
within the period of occurrence-based coverage (before 1986) into
the period of claims-made coverage (from and after 1986). The trial
court denied the insurers' motions, ruling that the key issues of
"trigger" and allocation raised in these motions will be resolved at
trial. In the first phase of the trial, the court granted 3M partial
declaratory judgment on the question of when insurance coverage is
"triggered". The court also granted the insurers' motion for
partial declaratory judgment on the question of allocation method to
be applied in the case. Trial continues with further developments
expected on the allocation issue, including the specific application
of the court selected method of allocation to particular policies.
If the occurrence insurers ultimately prevail in this insurance
litigation, the company could be effectively deprived of significant
insurance coverage, the amount of which is not presently
determinable, for breast implant claims. (See discussion of the
accrued receivables for insurance recoveries below).
The company believes it will ultimately prevail in this insurance
litigation. The company's belief is based on an analysis of its
insurance policies, court decisions on similar issues, reimbursement
by insurers for these types of claims and consultation with outside
counsel expert in insurance coverage matters.
The company had accrued receivables for insurance recoveries of $869
million as of June 30, 1996. There are various factors that could
affect the timing and amount of proceeds to be received under the
company's various insurance policies, including (i) the timing of
payments made in settlement of claims, (ii) the outcome of
occurrence insurance litigation in the courts of Minnesota (as
discussed above) and Texas, (iii) potential arbitration with claims-
made insurers, and (iv) delays in payment by insurers. There can be
no absolute assurance that the company will collect all amounts
accrued as being probable of recovery from its insurers.
The company's current estimate of the probable liabilities,
associated expenses and probable insurance recoveries related to the
breast implant claims is based on the facts and circumstances
existing at this time. New developments may occur that could affect
the company's estimates of probable liabilities (including
associated expenses) and the probable amount of insurance
recoveries. These developments include, but are not limited to, (i)
the number of plaintiffs who elect to opt out and pursue individual
claims against the company, (ii) the success of and costs to the
company in defending such individual claims, including claims
involving breast implants not manufactured or sold by the company,
(iii) the outcome of the occurrence insurance litigation in the
courts of Minnesota and Texas, (iv) the outcome of potential
arbitration with claims-made insurers, and (v) the availability of
coverage with respect to certain of the types of claims or remedies
to which the company may be subject.
The company cannot determine the impact of these potential
developments on the current estimate of probable liabilities
(including associated expenses) and the probable amount of insurance
recoveries. Accordingly, the company is not able to estimate its
potential future liabilities beyond the current estimate of probable
liabilities. As new developments occur, the estimates may be
revised, or additional charges may be necessary to reflect the
impact of these developments on the costs to the company of
resolving breast implant litigation and claims. While such
revisions or additional future charges could have a material adverse
impact on the company's net income in the quarterly period in which
they are recorded, the company believes that such revisions or
additional charges, if any, will not have a material adverse effect
on the consolidated financial position or annual results of
operations of the company.
The company conducts ongoing reviews, assisted by outside counsel,
to determine the adequacy and extent of insurance coverage provided
by its occurrence and claims-made insurers. The company believes,
based on these ongoing reviews and the bases described in the fourth
preceding paragraph, that the collectible coverage provided by its
applicable insurance policies is sufficient to cover substantially
all of its current exposure for breast implant claims and defense
costs. Based on the availability of this insurance coverage, the
company believes that its uninsured financial exposure has not
materially changed since the first quarter of 1994, and therefore,
no recognition of additional charges has been made.
Environmental Matters
The company is also involved in a number of environmental
proceedings by governmental agencies asserting liability for past
waste disposal and other alleged environmental damage. The company
conducts ongoing investigations, assisted by environmental
consultants, to determine accruals for the probable, estimable costs
of remediation. The remediation accruals are reviewed each quarter
and changes are made as appropriate.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The registrant held its Annual Meeting of Stockholders on
May 14, 1996.
(b) Proxies for the meeting were solicited pursuant to Regulation 14:
there was no solicitation in opposition to management's nominees
as listed in the Proxy Statement and all such nominees were
elected.
Directors elected to the 1999 Class were Ronald A. Mitsch,
Rozanne L. Ridgway, Frank Shrontz, Louis W. Sullivan.
Directors elected to the 1997 Class were Ronald O. Baukol,
W. George Meredith.
Directors whose terms continue after the meeting were
Edward A. Brennan, Livio D. DeSimone, Allen F. Jacobson,
Jerry R. Junkins, Allen E. Murray, Aulana L. Peters,
F. Alan Smith.
(c) Briefly described below are the other matters voted upon at the
Annual Meeting and the number of affirmative votes and negative
votes cast.
i) Ratification of the appointment of Coopers & Lybrand L.L.P.,
independent certified public accountants, to audit the books and
accounts of the company and its subsidiaries for the year 1996.
For 342,108,511
Against 1,365,353
Abstain 1,091,908
Broker Non-Vote 0
ii) Stockholder proposal regarding reincorporation.
For 6,861,356
Against 297,513,453
Abstain 5,308,283
Broker Non-Vote 34,882,680
Item 5. Other Information
The company filed a final Form 10 registration statement,
dated June 21, 1996, with the Securities and Exchange
Commission (SEC), relating to the new company, named
Imation Corp., that was spun-off effective July 1, 1996.
This statement was furnished in connection with the
distribution of Imation common shares by 3M to holders of
record of 3M common stock at the close of business on June
28, 1996. Refer to the Form 8-K filing referred to in this
Form 10-Q under Item 6.(b) for additional information.
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as exhibits to this
Report.
(11) A statement regarding the computation of per share
earnings. Page 24.
(12) A statement regarding the calculation of ratio of
earnings to fixed charges. Page 25.
(15) A letter from the company's independent accountants
regarding unaudited interim financial statements.
Page 26.
(27) Financial data schedule (EDGAR filing only).
(b) The company filed a report on Form 8-K dated July 26,
1996, in connection with the distribution of the stock
of Imation Corp.
July 26, 1996: Item 5, Other Events, reporting the
distribution by 3M of the common stock of Imation Corp.
to the Registrant's shareholders pursuant to a Transfer
and Distribution Agreement, dated as of June 18, 1996.
The Distribution was effected as a special dividend of
one share of Imation common stock for every ten shares
of common stock of the Registrant held of record as of
the close of business on June 28, 1996. Certificates
for Imation common stock were mailed to holders of the
Registrant's common stock on or about July 15, 1996.
July 26, 1996: Item 7, Pro Forma Financial Information
and Exhibits. A pro forma consolidated balance sheet as
of March 31, 1996, and proforma consolidated income
statements for the three month period ended March 31,
1996 and for the year ended December 31, 1995 will not
be filed since the transaction described in Item 5 is
fully reflected in the Registrant's consolidated
balance sheet as of June 30, 1996, and previously issued
statements of income already reflect the disposition.
Exhibits include the Transfer and Distribution
Agreement, dated as of June 18, 1996; Imation Corp.
Information Statement, dated June 21, 1996; and Press
Release, dated June 19, 1996.
None of the other items contained in Part II of this Form 10-Q are
applicable to the company for the quarter ended June 30, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MINNESOTA MINING AND MANUFACTURING COMPANY
(Registrant)
Date: July 29, 1996
/s/ Giulio Agostini
Giulio Agostini, Senior Vice President and
Chief Financial Officer
(Mr. Agostini is the Principal Financial
and Accounting Officer and has been duly
authorized to sign on behalf of the
registrant.)
EXHIBIT 11
MINNESOTA MINING AND MANUFACTURING COMPANY AND SUBSIDIARIES
EARNINGS PER SHARE OF COMMON STOCK
(Unaudited)
Three months ended Six months ended
June 30 June 30
1996 1995 1996 1995
------- ------- ------- -------
(Millions)
Income from continuing operations $381 $346 $743 $701
Discontinued operations -- 7 -- 28
Net income $381 $353 $743 $729
- -------------------------------------------------------------------------------
Primary earnings per share:
Continuing operations $.91 $.82 $1.78 $1.67
Discontinued operations -- .02 -- .07
Net Income $.91 $.84 $1.78 $1.74
Weighted average number of
common shares outstanding 418,857,994 420,177,239 418,711,908 419,999,904
- -------------------------------------------------------------------------------
Fully diluted earnings
per share: (1)
Continuing operations $.90 $.82 $1.75 $1.65
Discontinued operations -- .02 -- .07
Net Income $.90 $.84 $1.75 $1.72
Weighted average number of
common shares outstanding 418,857,994 420,177,239 418,711,908 419,999,904
Common equivalent shares 6,716,537 4,939,264 6,716,537 4,350,999
----------- ----------- ----------- -----------
Average number of common
and common equivalent
shares outstanding 425,574,531 425,116,503 425,428,445 424,350,903
- -------------------------------------------------------------------------------
Primary earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for each period.
The calculation excludes the effect of common equivalent shares
resulting from stock options using the treasury stock method as the
effect would not be material.
Fully diluted earnings per share is computed based on the weighted
average number of common shares and common equivalent shares
outstanding for each period.
(1) This calculation is submitted in accordance with Regulation S-K
Item 601(b)(11) although not required by APB Opinion No. 15 because it
results in dilution of less than 3%.
EXHIBIT 12
MINNESOTA MINING AND MANUFACTURING COMPANY AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
(Unaudited)
Six Months
Ended
June 30, Year Year Year Year Year
1996 1995 1994 1993 1992 1991
EARNINGS -------- ------- ------- ------- ------- -------
Income from continuing
operations before
income taxes and
minority interest $1,229 $2,168 $2,011 $1,851 $1,779 $1,620
Add:
Interest on debt 32 102 70 39 61 78
Interest component of the
ESOP benefit expense 18 37 39 41 42 44
Portion of rent under
operating leases
representative of the
interest component 24 51 46 44 44 44
Less:
Equity in undistributed
income of 20-50% owned
companies -- 1 2 -- (1) (6)
-------- ------- ------- ------- ------- -------
TOTAL EARNINGS AVAILABLE
FOR FIXED CHARGES $1,303 $2,357 $2,164 $1,975 $1,927 $1,792
FIXED CHARGES
Interest on debt 32 102 70 39 61 78
Interest component of the
ESOP benefit expense 18 37 39 41 42 44
Portion of rent under
operating leases
representative of the
interest component 24 51 46 44 44 44
------ ------ ------ ------ ------ ------
TOTAL FIXED CHARGES $ 74 $190 $155 $124 $147 $166
RATIO OF EARNINGS TO
FIXED CHARGES 17.61 12.41 13.96 15.93 13.11 10.80
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We are aware that our report dated July 29, 1996 on our reviews of
interim condensed consolidated financial information of Minnesota
Mining and Manufacturing Company and Subsidiaries (the Company) for
the three-month and six-month periods ended June 30, 1996 and 1995,
and included in the Company's Form 10-Q for the quarter ended June 30,
1996, is incorporated by reference in the Company's registration
statements on Form S-8 (Registration Nos. 2-78422, 33-14791, 33-48690,
33-49842, 33-58763 and 33-58767), and Form S-3 (Registration No. 33-
48089). Pursuant to Rule 436(c), under the Securities Act of 1933,
this report should not be considered a part of the registration
statements prepared or certified by us within the meaning of Sections
7 and 11 of that Act.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
St. Paul, Minnesota
July 29, 1996
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