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 September 30, 1997
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 September 30, 1997, there were 408,667,795 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 Nine months ended
September 30 September 30
1997 1996 1997 1996
Net sales $3,826 $3,623 $11,357 $10,613
Operating expenses
Cost of goods sold 2,173 2,069 6,418 6,045
Selling, general and
administrative expenses 952 916 2,861 2,706
Total 3,125 2,985 9,279 8,751
Operating income 701 638 2,078 1,862
Other income and expense
Interest expense 23 22 74 54
Investment and other
income - net (13) (17) (44) (54)
Gain on divestiture - net (803) -- (803) --
Total (793) 5 (773) --
Income before income taxes
and minority interest 1,494 633 2,851 1,862
Provision for income taxes 549 221 1,035 670
Minority interest 18 14 61 51
Net income $ 927 $ 398 $ 1,755 $ 1,141
Average shares outstanding 412.5 418.3 414.7 418.5
Per-share amounts
Net income $ 2.25 $ .95 $ 4.23 $ 2.73
Cash dividends declared
and paid $ .53 $ .49 $ 1.59 $ 1.43
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, except per-share amount)
September 30,
Assets 1997 December 31,
Current assets (Unaudited) 1996
Cash and cash equivalents $ 306 $ 583
Other securities 222 161
Accounts receivable - net 2,640 2,504
Inventories
Finished goods 1,253 1,195
Work in process 626 591
Raw materials and supplies 494 478
Total inventories 2,373 2,264
Other current assets 1,082 974
Total current assets 6,623 6,486
Investments 623 585
Property, plant and equipment 12,031 12,050
Less accumulated depreciation (7,117) (7,206)
Property, plant and equipment - net 4,914 4,844
Other assets 1,261 1,449
Total $13,421 $13,364
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 908 $ 895
Payroll 337 300
Income taxes 548 201
Short-term debt 585 1,117
Other current liabilities 1,105 1,093
Total current liabilities 3,483 3,606
Other liabilities 2,483 2,623
Long-term debt 1,131 851
Stockholders' equity
Common stock, $.50 par value (no par - 1996),
472,016,528 shares issued 236 296
Capital in excess of par value 60 --
Retained earnings 9,744 8,756
Unearned compensation - ESOP (388) (412)
Cumulative translation - net (394) (178)
Debt and equity securities, unrealized gain - net 7 15
Treasury stock, at cost
September 30, 1997, 63,348,733 shares;
December 31, 1996, 55,180,520 shares (2,941) (2,193)
Stockholders' equity - net 6,324 6,284
Total $13,421 $13,364
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)
Nine months ended
September 30
1997 1996
Cash Flows from Operating Activities
Net income $1,755 $1,141
Adjustments to reconcile net income
to net cash provided by operating activities
Gain on divestiture - net (803) --
Income tax payable relating to divestiture 308 --
Implant litigation - net 130 (209)
Depreciation and amortization 654 659
Working capital and other changes - net (386) (350)
Net cash provided by continuing operations 1,658 1,241
Net cash (used) provided by discontinued operations (92) 156
Net cash provided by operating activities 1,566 1,397
Cash Flows from Investing Activities
Capital expenditures (1,002) (759)
Proceeds from divestiture 1,000 --
Other changes - net 37 (32)
Net cash provided (used) by investing activities 35 (791)
Cash Flows from Financing Activities
Change in short-term debt - net (90) 117
Repayment of long-term debt (546) (9)
Proceeds from long-term debt 334 2
Purchases of treasury stock (1,229) (329)
Reissuances of treasury stock 294 211
Payment of dividends (661) (599)
Other (22) 81
Net cash used in financing activities (1,920) (526)
Effect of exchange rate changes on cash 42 19
Net (decrease) increase in cash and cash equivalents (277) 99
Cash and cash equivalents at beginning of year 583 485
Cash and cash equivalents at end of period $ 306 $ 584
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 1996 Annual Report on Form 10-K.
Earnings per share:
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share." This statement establishes
standards for computing and presenting basic and diluted earnings per
share (EPS) for financial statements issued for periods ending after
December 15, 1997. The adoption of this statement will not have a
material effect on the company's reported EPS.
Reclassifications:
Certain reclassifications have been made to December 31, 1996,
balance sheet amounts to conform with the current year presentation.
Common Stock:
At the Annual Meeting of Stockholders held on May 13, 1997, the
company's shareholders approved an amendment to the company's
Restated Certificate of Incorporation (i) to increase the number of
authorized shares of common stock of the company from 500 million to
1 billion shares and (ii) to change the par value of the company's
common stock from "no par value" to "$.50 par value." This change
resulted in a transfer of $60 million from common stock to capital in
excess of par value.
General Employees' Stock Purchase Plan (GESPP):
The 1997 GESPP, approved by stockholders at the Annual Meeting, is
similar to previous plans. However, all options under the 1997 plan
will be automatically exercised on the last business day of each
month. Substantially all employees are eligible to participate.
Debt Issuance:
On April 7, 1997, the company issued a four-year $250 million 6.625
percent Eurobond. After giving effect to an interest rate swap
effected on the same date for the same term as the Eurobond, the
company will have an interest obligation based on a floating LIBOR
index.
Gain on Divestiture:
Effective August 15, 1997, the company sold National Advertising
Company, its outdoor and mall advertising subsidiary, to Outdoor
Systems, Inc., of Phoenix, Arizona, for cash proceeds of $1 billion.
After adjusting for the net cost of the assets sold and for the
expenses associated with the divestiture, the company realized a pre-
tax gain of $803 million ($495 million after-tax). On an annualized
basis, National Advertising Company had sales of about $200 million
and operating income of about $35 million.
Derivative Accounting Policy:
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 as, and effective as, hedges and
are fully correlated as required by generally accepted accounting
principles. Instruments that do not qualify for hedge accounting are
marked to market with changes recognized in current earnings. The
company does not hold or issue derivative financial instruments for
trading purposes and is not a party to leveraged derivatives.
Realized and unrealized gains and losses for qualifying hedge
instruments are deferred until offsetting gains and losses on the
underlying transactions are recognized in earnings. These gains and
losses generally are recognized either as interest expense over the
borrowing period for interest rate and currency swaps; as an
adjustment to cost of goods sold for inventory-related hedge
transactions; or in stockholders' equity for hedges of net
investments in international companies. Cash flows attributable to
these financial instruments are included with the cash flows of the
associated hedged items.
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 auditors, have
performed a review of the unaudited interim financial statements
included herein and their report thereon accompanies this filing.
Report of Independent Auditors
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 September 30, 1997, and the related condensed consolidated
statements of income for the three-month and nine-month periods ended
September 30, 1997 and 1996, and cash flows for the nine-month
periods ended September 30, 1997 and 1996. 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,
1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated February 10, 1997, 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,
1996, 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
October 22, 1997
Minnesota Mining and Manufacturing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Third Quarter
Worldwide sales for the third quarter totaled $3.826 billion, an
increase of 5.6 percent from the third quarter last year. Excluding
changes in currency exchange rates, sales rose about 11 percent,
driven by increases in volume. Selling prices both in the United
States and abroad were about the same as in the third quarter last
year.
In the Life Sciences Sector, sales increased about 12 percent in
local currencies. Pacing this revenue growth were the sector's
pharmaceuticals, traffic control materials and commercial graphics
businesses.
In the Industrial and Consumer Sector, sales increased about 10
percent in local currencies. Growth was well-balanced among the
sector's major businesses, which include tapes, abrasives, specialty
chemicals and electronic products.
In the United States, sales were up about 9 percent to $1.910
billion. Internationally, sales totaled $1.916 billion. Volume
increased about 12 percent and currency translation reduced
international sales by about 10 percent. 3M saw solid volume gains
in all major geographic areas, with Europe, the Asia Pacific area and
Latin America all posting double-digit volume growth. In Europe,
volume increased 12 percent, with solid volume gains in Germany,
France, the U.K. and Italy. In the Asia Pacific area, volume
increased about 10 percent, with growth in the Asia region, excluding
Japan, of more than 20 percent. In Japan, volume growth this quarter
was less than 4 percent, held back by strong growth in the year-
earlier quarter and a slowdown in the Japanese economy. In Latin
America, volume rose about 18 percent, continuing that region's
record of healthy gains. In Canada, volume increased about 3
percent.
Worldwide, this was the fifth consecutive quarter in which the
company has posted double-digit volume growth.
Cost of goods sold, which includes manufacturing, research and
development, and engineering, was 56.8 percent of sales, down
slightly from the third quarter last year. Gross margins benefited
from volume growth, productivity improvement and a positive carryover
on raw material costs. Changes in currency exchange rates reduced
gross margins by about seven-tenths of a percentage point. This
effect relates to the exchange rate impact on the movement of goods
transferred between the parent company in the United States and 3M's
international companies.
Selling, general and administrative spending was 24.9 percent of
sales, down four-tenths of a point from the same quarter last year.
Productivity improvements and emphasis on cost control had a positive
effect on these costs.
Operating income was $701 million, up 9.9 percent from the year-
earlier quarter. Currency reduced operating income by about $46
million, or about 7 percent. In the United States, operating income
was 19.7 percent of sales, up more than one percentage point from the
third quarter last year. U.S. profits increased about 17 percent.
Internationally, operating income was 16.9 percent of sales, up
slightly from the year-earlier quarter. International profits rose
about 3 percent in dollars and 21 percent in local currencies.
Worldwide operating income was 18.3 percent of sales, up seven-tenths
of a percentage point from the third quarter last year.
Third quarter interest expense of $23 million was up $1 million from
the same quarter last year. Net investment and other income was $13
million, down $4 million from the year-earlier quarter. The pre-tax
gain on the sale of National Advertising Company totaled $803
million. The impact of this gain on 3M's income statement and tax
rate is summarized below.
Supplemental Consolidated Statement of Income Summary (Unaudited)
Three months ended September 30, 1997
(Amounts in millions, except tax rate and per-share amounts)
Excluding Gain on Reported
divestiture divestiture total
Income before income taxes
and minority interest $ 691 $ 803 $1,494
Effective tax rate 35.0% 38.4% 36.8%
Provision for income taxes $ 241 $ 308 $ 549
Minority interest $ 18 $ 18
Net income $ 432 $ 495 $ 927
Average shares outstanding 412.5 412.5 412.5
Net income per share $ 1.05 $ 1.20 $ 2.25
Excluding the divestiture, the worldwide effective income tax rate
for the quarter was 35.0 percent, the same as in the third quarter
last year. The gain on the sale of National Advertising was taxed
fully in the United States at a rate of 38.4 percent (federal
statutory rate of 35 percent and a net effective state tax rate of
3.4 percent). This results in a total 3M combined effective tax rate
of 36.8 percent for the quarter.
Net income totaled $927 million, or $2.25 per share ($432 million, or
$1.05 a share, excluding the gain on divestiture), compared to $398
million, or $.95 a share, in the third quarter of 1996. Excluding
the gain on the divestiture, per-share income was up 10.5 percent.
The company estimates that changes in the value of the U.S. dollar
decreased earnings for the quarter by about 7 cents per share
compared with the third quarter of 1996. This estimate includes the
effect of translating profits from local currencies into U.S. dollars, the
exchange rate impact on the movement of goods transferred between the
parent company in the United States and 3M's 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, would not have a material
adverse effect on the consolidated financial position or annual
results of operations of the company.
Year-to-date
On a year-to-date basis, worldwide sales totaled $11.357 billion, an
increase of 7.0 percent from $10.613 billion in the first nine months
of last year. Excluding changes in currency exchange rates, sales
rose about 11 percent, driven by increases in volume. Selling prices
were about the same as in the first nine months of last year. Both
business sectors contributed about equally to this local-currency
revenue gain.
In the United States, sales were up 10.4 percent to $5.480 billion.
Volume rose about 10 percent, while selling prices were flat.
Internationally, sales volume increased about 13 percent and selling
prices were down slightly. Currency translation reduced
international sales by about 8 percent.
Cost of goods sold, which includes manufacturing, research and
development, and engineering, was 56.5 percent of sales, down five-
tenths of a percentage point from the first nine months of last year.
Gross margins benefited from volume growth, productivity improvement,
and from a positive carryover on raw material costs, but were
penalized by the effect of currency exchange rates. Research and
development spending was 6.6 percent of sales, down one-tenth of a
point from the first nine months of last year.
Selling, general and administrative spending was 25.2 percent of
sales, down three-tenths of a point from the first nine months of
last year. Productivity improvements and emphasis on cost control had
a positive effect on these costs.
Operating income was $2.078 billion, up about 12 percent from the
first nine months of last year. In the United States, profits
increased at a double-digit rate. Internationally, profits showed a
solid increase in local currencies, and were up 4 percent in dollars.
Currency reduced international operating income by about $134
million, or 13 percent.
Interest expense of $74 million was up $20 million from the first
nine months of last year. Interest expense increased due to several
factors, including slightly higher debt balances and higher interest
rate resets on some long-term floating-rate issues. Net investment
and other income was $44 million, down $10 million from the first
nine months of last year. The pre-tax gain on the sale of National
Advertising Company totaled $803 million. The impact of this gain on
3M's income statement and tax rate is summarized below.
Supplemental Consolidated Statement of Income Summary (Unaudited)
Nine months ended September 30, 1997
(Amounts in millions, except tax rate and per-share amounts)
Excluding Gain on Reported
divestiture divestiture total
Income before income taxes
and minority interest $2,048 $ 803 $2,851
Effective tax rate 35.5% 38.4% 36.3%
Provision for income taxes $ 727 $ 308 $1,035
Minority interest $ 61 $ 61
Net income $1,260 $ 495 $1,755
Average shares outstanding 414.7 414.7 414.7
Net income per share $ 3.04 $ 1.19 $ 4.23
Excluding the divestiture the worldwide effective income tax rate was
35.5 percent in the first nine months of 1997, down from 36.0 percent
in the same period last year. The gain on the sale of National
Advertising was taxed fully in the United States at a rate of 38.4
percent (federal statutory rate of 35 percent and a net effective
state tax rate of 3.4 percent). This results in a total 3M combined
effective tax rate of 36.3 percent for the first nine months.
Net income totaled $1.755 billion, or $4.23 per share ($1.260 billion
or $3.04 a share, excluding the gain on divestiture), compared to
$1.141 billion, or $2.73 a share, in the first nine months of 1996.
Excluding the gain on the divestiture, per-share income was up 11.4
percent. The company estimates that changes in the value of the U.S.
dollar decreased earnings for the first nine months of 1997 by about
16 cents per share compared with the same period last year. This
estimate includes the effect of translating profits from local
currencies into U.S. dollars, the exchange rate impact on the
movement of goods transferred between the parent company in the
United States and 3M's international companies, and transaction gains
and losses in countries not considered to be highly inflationary.
FUTURE OUTLOOK
3M expects solid sales and earnings growth to continue in the fourth
quarter of 1997. The company expects to benefit from major new
product programs, intensified customer satisfaction efforts, on-going
productivity improvement, further expansion into international
markets, and efforts to streamline 3M's supply chain.
While volume and productivity are expected to help 1997 results,
currency effects will moderate profit growth. Based on current
exchange rates, currency could negatively impact earnings for the
full year by about 25 cents a share. Raw material costs are expected
to be down slightly for 1997 as a whole.
For the year 1997, capital spending is expected to total about $1.4
billion. The company is investing capital to help sustain top-line
growth and to increase manufacturing efficiency.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for certain forward-looking statements. This Quarterly Report
on Form 10-Q contains forward-looking statements that reflect the
company's current views with respect to future events and financial
performance.
These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially
from historical results or those anticipated. The words "aim,"
"believe," "expect," "anticipate," "intend," "estimate" and other
expressions that indicate future events and trends identify forward-
looking statements. Actual future results and trends may differ
materially from historical results or those anticipated depending on
a variety of factors, including, but not limited to, foreign exchange
rates and fluctuations in those rates; the effects of, and changes
in, worldwide economic conditions; raw materials, including shortages
and increases in the costs of key raw materials; and legal
proceedings (see discussion of Legal Proceedings in Part II, Item 1
of this Form 10-Q).
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity remain strong.
Working capital increased $260 million to $3.140 billion from $2.880
billion as of December 31, 1996. The accounts receivable average
days' sales outstanding was 58 days, down 2 days from year-end 1996.
The company's key inventory index was 3.8 months, unchanged from
year-end. The company's current ratio was 1.9, essentially unchanged
from year-end.
Total debt decreased $252 million from year-end 1996 to $1.716
billion. Current maturities of long-term debt are anticipated to be
funded through new debt issuances. The company's borrowings continue
to maintain AAA long-term ratings. As of September 30, 1997, total
debt was 21 percent of total capital. 3M expects this to increase to
about 25 percent of total capital by year-end, consistent with
historical levels.
Excluding the gain on divestiture, return on average stockholders'
equity for the first nine months was 26.6 percent, exceeding the
company's goal of 20 to 25 percent. Return on capital employed for
the first nine months was 26.5 percent, up from 25.0 percent in the
comparable 1996 period. The company's goal is 27 percent or better.
Net cash provided by operating activities from continuing operations
totaled $1.658 billion in the first nine months of the year, up $417
million from the same period last year. The first nine months of
1997 had a $339 million positive net cash flow change related to
mammary implant litigation when compared to the same period last
year. The cash flow from the first nine months of 1997 helped
support increased working capital needs related to double-digit
volume growth.
Timing differences between payment of implant liabilities and receipt
of related insurance recoveries could affect the cash flows of future
periods. A detailed discussion regarding the timing differences is
contained in Part II, Item 1, Legal Proceedings, of this Form 10-Q.
Net cash used by operating activities from discontinued operations
was $92 million in the first nine months compared with $156 million
of cash provided in the same period last year. During 1996 the
company generated cash from discontinued operations by liquidating
audio/video assets and operating Imation's businesses before the spin-
off. Payments made in 1997 primarily reflect severance payments
related to discontinued operations.
Cash provided by investing activities was $35 million in the first
nine months of the year, compared to $791 million of cash used in the
same period last year. Capital expenditures for the first nine
months of 1997 were about $1 billion, an increase of 32 percent
compared with the same period last year. Cash proceeds related to
the sale of National Advertising Company totaled $1 billion.
Net proceeds from the National Advertising Company divestiture and
implant litigation were primarily used to repurchase shares and to
reduce short-term debt during the third quarter of 1997. Treasury
stock repurchases for the first nine months of 1997 were $1.229
billion, compared with repurchases in the same period last year of
$329 million. Financing activities for both short-term and long-term
debt provided net cash outflows of $302 million, compared with net
cash inflows of $110 million in the first nine months last year.
The company repurchased about 13.6 million shares of common stock in
the first nine months of this year, compared with 5.0 million shares
in the same period last year. In November 1996, the Board of
Directors authorized the repurchase of up to 10 million shares of 3M
common stock through December 31, 1997. In May 1997, the Board
authorized the repurchase of up to 10 million additional shares of
the company's stock, bringing the current stock buyback authorization to a
total of 20 million shares. As of September 30, 1997, 5.1 million
shares remained authorized for repurchase. Stock repurchases are
made to support employee stock purchase plans and for other corporate
purposes.
Cash dividends paid to shareholders increased about 10 percent.
Payments totaled $661 million in the first nine months of this year,
compared with $599 million in the same period last year. In February
1997, the quarterly dividend was increased to 53 cents a share.
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 September 30, 1997, $373 million of the
shelf registration was available for future financial needs. 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.
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, would not have a
material adverse effect on the consolidated financial position or
annual results of operations of the company.
Breast Implant Litigation
As of September 30, 1997, the company had been named as a defendant,
often with multiple co-defendants, in 7,250 lawsuits and 171 claims
in various courts, all seeking damages for personal injuries from
allegedly defective breast implants. These claims and lawsuits
purport to represent 23,195 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 also
was named McGhan Medical Corporation.
The typical claim or lawsuit alleges the individual's breast
implants caused one or more of a wide variety of ailments and local
complications, including, but not limited to, non-specific
autoimmune disease, scleroderma, lupus, rheumatoid arthritis,
fibromyalgia, mixed connective tissue disease, Sjogren's Syndrome,
dermatomyositis, polymyositis and chronic fatigue.
Plaintiffs in these cases typically seek monetary damages, often in
unspecified amounts, and may also seek certain types of equitable
relief, including requiring the company to fund the costs associated
with removal of the breast implants.
A number of breast implant claims and lawsuits seek to impose
liability on the company under various theories for personal
injuries allegedly caused by breast implants manufactured and sold
by manufacturers other than the company. These manufacturers
include, but are not limited to, McGhan Medical Corporation and
manufacturers that are no longer in business or that are insolvent,
whose breast implants may or may not have been used in conjunction
with implants manufactured and sold by the company. These claims
raise many difficult and complex factual and legal issues that are
subject to many uncertainties, including the facts and circumstances
of each particular claim, the jurisdiction in which each suit is
brought, and differences in applicable law and insurance coverage.
A number of breast implant lawsuits seek to recover punitive
damages. Any punitive damages that may be awarded against the
company may or may not be covered by certain insurance policies
depending on the language of the insurance policy, applicable law
and agreements with insurers.
In addition to 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 Louisiana state court action
(SPITZFADEN, ET AL., v. DOW CORNING CORPORATION, ET AL., Dist Ct.,
Parish or Orleans, 92-2589) is currently in trial solely against the
Dow Chemical Company.
The company also has been served with a purported class action
brought on behalf of children allegedly exposed to silicone in utero
and through breast milk. (FEUER, ET AL., V. MCGHAN, ET AL.,
U.S.D.C., E. Dist. NY, 93-0146.) The suit names all breast implant
manufacturers as defendants and seeks to establish a medical-
monitoring fund.
On December 22, 1995, the Court approved a revised class action
settlement program for resolution of claims seeking damages for
personal injuries from allegedly defective breast implants (the
"Revised Settlement Program"). The Revised Settlement Program is a
revision of a previous settlement pursuant to a Breast Implant
Litigation Settlement Agreement (the "Settlement Agreement") reached
on April 8, 1994, and approved by the Court on September 1, 1994.
Appeals related to the Revised Settlement Program are pending.
The Court ordered that, beginning after November 30, 1995, members
of the plaintiff class may choose to participate in the Revised
Settlement Program or opt out, which would then allow them to
proceed with separate products liability actions.
The Revised Settlement Program as recently supplemented now includes
both foreign and domestic class members with implants manufactured
by certain manufacturer defendants, including Baxter International,
Bristol Meyers-Squibb, 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
foreign claimants and 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 domestic claimants
with 3M implants. Post 8/84 McGhan implant 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. In addition to certain
miscellaneous benefits, the Revised Settlement Program provides for
two compensation options 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 of the Revised Settlement Program. Current claimants with only
Post 8/84 McGhan implants (or only Post 8/84 McGhan implants plus
certain other manufacturers' implants) are eligible only for
benefits ranging from $10,000 to $50,000.
Eligible participants with 3M implants who did not file current
claims but are able to satisfy the more restrictive disease and
severity criteria during an ongoing period of 15 years will be
eligible for the Long-Term Benefits, subject to certain funding
limitations. Such participants also will be eligible for an advance
payment of $1,000 upon proof of having 3M implants and upon waiving
or not timely exercising the right to opt out of the Revised
Settlement Program. Benefit levels for eligible participants who
are not current claimants and have only Post 8/84 McGhan implants
(or only Post 8/84 McGhan implants plus certain other manufacturers'
implants) or who are current foreign claimants will range from
$10,000 to $50,000. Benefits to foreign registrants other than
current foreign claimants will be developed by the Foreign Claimants
Committee in consultation with the Court.
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 ultimately will choose to participate in the Revised
Settlement Program, what disease criteria they will satisfy, and
what options they will choose. As a result, the total amount and
timing of the company's prospective payments under the Revised
Settlement Program cannot be determined with precision at this time.
In January 1996, the company paid $125 million into a court-
administered fund as an initial reserve against costs of claims
payable by the company under the Revised Settlement Program (along
with a $5 million administrative assessment). Since that time the
company has paid an additional $1.8 million into that fund and the
company expects to make multiple payments of a similar or larger
amount into the fund during the fourth quarter of 1997.
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, 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 of $604 million as of September 30, 1997 (which
includes the January 1996 payment of $130 million under the Revised
Settlement Program) for defense and other costs and settlements with
litigants and claimants, the company had accrued liabilities of $387
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 the failure of many insurers to voluntarily perform as
promised subjects them to the company's claims for excess liability
and damages for breach of the insurers' obligation of good faith.
On September 22, 1994, three excess coverage occurrence insurers
initiated in the courts of the State of Minnesota a declaratory
judgment action against the company and numerous insurance carriers
seeking adjudication of certain coverage issues and allocation among
insurers. On December 9, 1994, the company initiated an action
against its occurrence insurers in the Texas State Court in and for
Harrison County, seeking a determination of responsibility among the
company's various occurrence insurers with applicable coverages. The
state of Texas has the most implant claims. This action has since
been removed to the U.S. District Court, Eastern District of Texas,
and stayed pending resolution of the litigation in the Minnesota
courts.
The insurers that are parties to these actions generally acknowledge
that they issued products liability insurance to the company and
that breast implant claims are products liability claims. The trial
in Minnesota to resolve the company's insurance coverage and the
financial responsibility of occurrence insurers for breast implant
claims and defense costs began on June 4, 1996 and is continuing in
phases as scheduled by the court.
In mid-October 1995, the occurrence insurers that are parties to the
litigation in Minnesota filed more than 30 motions for summary
judgment or partial summary judgment. The insurers, through these
motions, attempted to shift all or a portion of the responsibility
for those claims the company believes fall within the period of
occurrence-based coverage (before 1986) 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 would be resolved at trial. In
the trial's first phase, the court granted 3M partial declaratory
judgment on the question of when insurance coverage is triggered.
The court also granted the insurers' motion for partial declaratory
judgment on the question of the allocation method to be applied in
the case. The trial court has now ruled further on the trigger
issue and on the allocation method. That ruling is consistent with
and further supports the company's opinion as stated in the
following paragraph.
The company believes it ultimately will prevail in this insurance
litigation. The company's belief is based on an analysis of its
insurance policies; court decisions on these and similar issues;
reimbursement by insurers for these types of claims; and
consultation with outside counsel who are experts in insurance
coverage matters. If, however, the occurrence insurers ultimately
prevail in this insurance litigation, the company could be
effectively deprived of significant insurance coverage for breast
implant claims, the amount of which is not presently determinable.
(See discussion of the accrued receivables for insurance recoveries
below.)
As of September 30, 1997, the company had accrued receivables for
insurance recoveries of $667 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) the outcome of occurrence
insurance litigation in the courts of Minnesota (as discussed above)
and Texas, (iii) potential arbitration with claims-made insurers,
(iv) delays in payment by insurers and (v) the extent to which
insurers may become insolvent in the future. There can be no
absolute assurance that the company will collect all amounts 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 have opted out and are pursuing
individual claims against the company and who are ultimately
identified as having the company's implants, (ii) the success of and
costs to the company in defending such opt-out 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, and (iv) the outcome of potential
arbitration with claims-made insurers.
The company cannot determine the impact of these potential
developments on the current estimate of probable liabilities
(including associated expenses) and the probable amount of insurance
recoveries. Accordingly, the company is not able to estimate its
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, would 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. Therefore, no
recognition of additional charges has been made.
Environmental Matters
The company also is involved in a number of environmental
proceedings by governmental agencies and by private parties
asserting liability for past waste disposal and other alleged
environmental damage. The company conducts ongoing investigations,
assisted by environmental consultants, to determine accruals for the
probable, estimable costs of remediation. The remediation accruals
are reviewed each quarter and changes are made as appropriate.
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 auditors
regarding unaudited interim financial statements.
Page 26.
(27) Financial data schedule (EDGAR filing only).
None of the other item requirements of Part II of Form 10-Q are
applicable to the company for the quarter ended September 30, 1997.
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: October 29, 1997
/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 Nine months ended
September 30 September 30
1997 1996 1997 1996
------- ------- ------- -------
(Millions)
Net income $ 927 $398 $1,755 $1,141
- ------------------------------------------------------------------------------
Primary earnings per share:
Net Income $2.25 $.95 $4.23 $2.73
Weighted average number of
common shares outstanding 412,541,940 418,329,485 414,705,514 418,513,444
- ------------------------------------------------------------------------------
Fully diluted earnings
per share: (1)
Net Income $2.21 $.93 $4.17 $2.68
Weighted average number of
common shares outstanding 412,541,940 418,329,485 414,705,514 418,513,444
Common equivalent shares 6,672,654 7,714,743 6,159,080 7,714,743
----------- ----------- ----------- -----------
Average number of common
and common equivalent
shares outstanding 419,214,594 426,044,228 420,864,594 426,228,187
- ------------------------------------------------------------------------------
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)
Nine Months
Ended
September 30, Year Year Year Year Year
1997 1996 1995 1994 1993 1992
EARNINGS ------- ------- ------- ------- ------- -------
Income from continuing
operations before
income taxes and
minority interest $2,851 $2,479 $2,168 $2,011 $1,851 $1,779
Add:
Interest on debt 74 79 102 70 39 61
Interest component of the
ESOP benefit expense 24 34 37 39 41 42
Portion of rent under
operating leases
representative of the
interest component 34 46 51 46 44 44
Less:
Equity in undistributed
income of 20-50% owned
companies 7 -- 1 2 -- (1)
----- ------- ------- ------- ------- -------
TOTAL EARNINGS AVAILABLE
FOR FIXED CHARGES $2,976 $2,638 $2,357 $2,164 $1,975 $1,927
FIXED CHARGES
Interest on debt 74 79 102 70 39 61
Interest component of the
ESOP benefit expense 24 34 37 39 41 42
Portion of rent under
operating leases
representative of the
interest component 34 46 51 46 44 44
---- ------ ------ ------ ------ ------
TOTAL FIXED CHARGES $ 132 $ 159 $ 190 $ 155 $ 124 $ 147
RATIO OF EARNINGS TO
FIXED CHARGES 22.55 16.59 12.41 13.96 15.93 13.11
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We are aware that our report dated October 22, 1997 on our reviews of
interim condensed consolidated financial information of Minnesota
Mining and Manufacturing Company and Subsidiaries (the Company) for
the three-month and nine-month periods ended September 30, 1997 and
1996, and included in the Company's Form 10-Q for the quarter ended
September 30, 1997, is incorporated by reference in the Company's
registration statements on Form S-8 (Registration Nos. 33-14791, 33-
49842, 33-58767, 333-26957, 333-30689 and 333-30691), 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
October 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS AND NOTES.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 306
<SECURITIES> 222
<RECEIVABLES> 2,640
<ALLOWANCES> 0
<INVENTORY> 2,373
<CURRENT-ASSETS> 6,623
<PP&E> 12,031
<DEPRECIATION> 7,117
<TOTAL-ASSETS> 13,421
<CURRENT-LIABILITIES> 3,483
<BONDS> 1,131
<COMMON> 236
0
0
<OTHER-SE> 6,088
<TOTAL-LIABILITY-AND-EQUITY> 13,421
<SALES> 11,357
<TOTAL-REVENUES> 11,357
<CGS> 6,418
<TOTAL-COSTS> 6,418
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74
<INCOME-PRETAX> 2,851
<INCOME-TAX> 1,035
<INCOME-CONTINUING> 1,755
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,755
<EPS-PRIMARY> 4.23
<EPS-DILUTED> 4.23
</TABLE>
