<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
Common Stock, Par Value $.50 Per Share New York Stock Exchange
Pacific Exchange
Chicago Stock Exchange
Note: The common stock of the registrant is also traded on the
Amsterdam Stock Exchange, Swiss stock exchanges and the Tokyo
Stock Exchange.
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X. No .
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by
nonaffiliates of the registrant, based on the closing price of
$83.50 per share as reported on the New York Stock Exchange-
Composite Index on January 30, 1998, was $33.7 billion.
Shares of common stock outstanding at January 31, 1998: 404,042,820.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated
by reference in Parts III and IV of this Form 10-K: (1) Proxy
Statement for registrant's 1998 annual meeting, (2) Form 10-Q for
period ended June 30, 1987; Form 8-K dated November 20, 1996;
Form 8-K dated June 30, 1997, (3) Registration Nos. 33-48089 and
333-30689.
This document contains 50 pages.
The exhibit index is set forth on page 45.
<PAGE> 2
MINNESOTA MINING AND MANUFACTURING COMPANY
FORM 10-K
For the Year Ended December 31, 1997
PART I
Item 1. Business.
Minnesota Mining and Manufacturing Company was incorporated in 1929 under the
laws of the State of Delaware to continue operations, begun in 1902, of a
Minnesota corporation of the same name. As used herein, the term "3M" includes
Minnesota Mining and Manufacturing Company and subsidiaries unless the context
otherwise indicates.
Discontinued Operations
In November 1995, the Board of Directors approved a plan to launch the company's
data storage and imaging businesses as an independent, publicly owned company
and to discontinue 3M's audio and video business. This is discussed in the
Notes to Consolidated Financial Statements.
General
3M is an integrated enterprise characterized by substantial intercompany
cooperation in research, manufacturing and marketing of products. 3M's business
has developed from its research and technology in coating and bonding for coated
abrasives, the company's original product. Coating and bonding is the process
of applying one material to another, such as abrasive granules to paper or cloth
(coated abrasives), adhesives to a backing (pressure-sensitive tapes), ceramic
coating to granular mineral (roofing granules), glass beads to plastic backing
(reflective sheeting), and low-tack adhesives to paper (repositionable notes).
3M is among the leading manufacturers of products for many of the markets it
serves. In all cases, 3M products are subject to direct or indirect competition.
Most 3M products involve expertise in product development, manufacturing and
marketing, and are subject to competition from products manufactured and sold by
other technically oriented companies.
At December 31, 1997, the company employed 75,639 people.
Business Segments
Financial information and other disclosures relating to 3M's two business
segments and 3M's operations in various geographic areas are provided in the
Notes to Consolidated Financial Statements. Effective with year-end 1998, the
company will adopt Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosure about Segments of an Enterprise and Related Information." The
company is reviewing the requirements of this statement and believes that it
will change, to some degree, the nature and extent of its current business
segment disclosure. This statement does not impact the basic consolidated
financial statements; it affects the presentation of segment information in the
Notes to Consolidated Financial Statements and this item of Form 10-K.
3M's two business sectors bring together common or related 3M technologies,
enhancing the development of innovative products and services and providing for
efficient sharing of business resources. These sectors have worldwide
responsibility for virtually all 3M product lines. A few miscellaneous
businesses and staff-sponsored products, as well as various corporate assets and
corporate overhead expenses, are not assigned to the sectors.
<PAGE> 3
Industrial and Consumer Sector: This sector provides pressure-sensitive
adhesives, specialty tapes, coated and nonwoven abrasives, specialty chemicals,
electronic and electrical products, and telecommunications products. This
sector participates in the following markets: Industrial Markets; Automotive
and Chemical Markets; Electro and Communications Markets; and Consumer and
Office Markets.
The Industrial Markets businesses manufacture and market a wide variety of high-
performance and general-purpose pressure-sensitive tapes, as well as specialty
products. Major product categories include industrial tapes made from materials
such as foil, film, vinyl and polyester; specialty tapes and adhesives,
including Scotch brand VHB brand Tapes, lithographic tapes, joining systems,
specialty additives, vibration control materials, liquid adhesives, and
reclosable fasteners; general-purpose tapes, such as masking, box-sealing and
filament; and labels and other materials for identifying and marking durable
goods. Other products include coated abrasives for grinding, conditioning and
finishing a wide range of surfaces; finishing compounds; and products for
maintaining and repairing vehicles.
The Automotive and Chemical Markets businesses' major automotive products
include body side-molding and trim; functional and decorative graphics;
corrosion-resistant and abrasion-resistant films; tapes for attaching
nameplates, trim and moldings; and fasteners for attaching interior panels and
carpeting. Major chemical products include protective chemicals for furniture,
fabrics and paper products; firefighting agents; fluoroelastomers for seals,
tubes and gaskets in engines; engineering fluids; and high-performance fluids
used in the manufacture of computer chips and for electronic cooling and
lubricating of computer hard disk drives. Other products include natural and
color-coated mineral granules for asphalt shingles. These businesses also serve
as a major resource for other 3M divisions, supplying specialty chemicals,
adhesives and films used in the manufacture of many 3M products.
The Electro and Communications Markets businesses provide products for the
electronic, electrical, telecommunication, and visual communication fields.
Electronic and electrical products include packaging and interconnection
devices; insulating materials, including pressure-sensitive tapes and resins;
and related items. These products are used extensively by manufacturers of
electronic and electrical equipment, as well as in the construction and
maintenance segments of the electric utility, telephone and other industries.
Telecommunications products serve the world's telephone companies with a wide
array of products for fiber-optic and copper-based telephone systems. These
include many innovative connecting, closure and splicing systems, maintenance
products and test equipment. Visual communication products serve the world's
office and education markets with overhead projectors and transparency films,
plus equipment and materials for electronic and multimedia presentations.
Major products in the Consumer and Office Markets businesses include Scotch
brand Tapes; Post-it brand Note products, including memo pads, labels, stickers,
pop-up notes and dispensers; home care products, including Scotch-Brite
brand Scouring Products, O-Cel-O brand Sponges and Scotchgard brand Fabric
Protectors; energy control products, such as window insulation kits; nonwoven
abrasive materials for floor maintenance and commercial cleaning; floor
mattings; and a wide range of home improvement products, including
surface-preparation and wood-finishing materials, and filters for furnaces
and air conditioners.
<PAGE> 4
Life Sciences Sector: This sector produces products that contribute to health
and safety for people around the world. The Life Sciences Sector's major
technologies include pressure-sensitive adhesives, substrates, extrusion and
coating, nonwoven materials, specialty polymers and resins, optical systems,
drug delivery systems, and electro-mechanical devices. On August 15, 1997, the
company sold National Advertising Company, an outdoor and mall advertising
subsidiary that was part of this sector. This sector participates in the
following markets: Medical Markets; Pharmaceuticals, Dental and Personal Care
Markets; and Traffic and Personal Safety Markets.
The Medical Markets businesses produce a broad range of medical supplies,
devices and equipment. Medical supplies include tapes, dressings, surgical
drapes and masks, biological indicators, orthopedic casting materials and
electrodes. Medical devices and equipment include stethoscopes, heart-lung
machines, sterilization equipment, blood gas monitors, and powered orthopedic
instruments. These businesses also develop and market health information
systems.
The Pharmaceuticals, Dental and Personal Care Markets businesses serve the
pharmaceutical and dental markets, as well as manufacturers of disposable
diapers. Pharmaceuticals include ethical drugs and drug-delivery systems. Among
ethical pharmaceuticals are analgesics, anti-inflammatories and cardiovascular
and respiratory products. Drug-delivery systems include metered-dose inhalers,
as well as transdermal skin patches and related components. Dental products
include dental restoratives, adhesives, impression materials, temporary crowns,
infection control products, and orthodontic brackets and wires. Personal Care
products include a broad line of closures for disposable diapers.
The Traffic and Personal Safety Markets businesses serve the following markets:
traffic control materials, commercial graphics, and occupational health and
safety. In traffic control materials, reflective sheetings are used on highway
signs, vehicle license plates, construction workzone devices, and trucks and
other vehicles. In commercial graphics, 3M supplies equipment, films, inks and
related products used to produce graphics for vehicles and signs. Major
occupational health and safety products include maintenance-free and reusable
respirators, plus personal monitoring systems. These businesses also market a
variety of other products, including spill-control sorbents, Thinsulate brand
and Lite Loft brand Insulations, traffic control devices, electronic
surveillance products, reflective materials for personal safety, and films
for protection against counterfeiting.
Distribution
3M products are sold directly to users and through numerous wholesalers,
retailers, jobbers, distributors and dealers in a wide variety of trades in many
countries around the world. Management believes that the confidence of
wholesalers, retailers, jobbers, distributors and dealers in 3M and its
products, developed through long association with skilled marketing and sales
representatives, has contributed significantly to 3M's position in the
marketplace and to its growth. 3M has 245 sales offices and distribution
centers worldwide, including nine major branch offices located in principal
cities throughout the United States. 3M operates 30 sales offices and
distribution centers in the United States. Internationally, 3M has 215 sales
offices and distribution centers.
<PAGE> 5
Research, Patents and Raw Materials
Research and product development constitute an important part of 3M's
activities. Products resulting from research and development have been major
drivers of 3M's growth. Research and development spending totaled $1.002
billion, $947 million and $883 million in 1997, 1996 and 1995, respectively.
Corporate research laboratories support research efforts of division and sector
laboratories. These corporate labs also engage in research not directly related
to existing 3M product lines. Most major operating divisions have their own
laboratories to improve existing products and develop new products. Research
staff groups provide specialized services in instrumentation, engineering and
process development. 3M also maintains an organization for technological
development not sponsored by other units of the company.
3M is the owner of many domestic and foreign patents derived primarily from its
research activities. 3M's business as a whole is not materially dependent upon
any one patent, license or trade secret, or upon any group of related patents,
licenses or trade secrets.
The company experienced no significant or unusual problems in the purchase of
raw materials during 1997. It is impossible to predict future shortages or the
impact such shortages would have.
Executive Officers
Following is a list of the executive officers of 3M, their ages, present
positions, the years elected to their present positions and other positions held
within 3M during the past five years. All of these officers have been employed
full time by 3M or a subsidiary of 3M for more than five years. All 3M officers
are elected by the Board of Directors at its annual meeting, with vacancies and
new positions filled at interim meetings. No family relationships exist among
any of the executive officers named, nor is there any arrangement or
understanding pursuant to which any person was selected as an officer.
<PAGE> 6
<TABLE>
Executive Officers (continued)
<CAPTION>
Year
Elected
to Present
Name Age Present Position Position Other Positions Held During 1993-1997
<S> <C> <C> <C> <C>
Livio D. DeSimone 61 Chairman of the Board 1991
and Chief Executive Officer
Ronald A. Mitsch 63 Vice Chairman of the 1998 Vice Chairman of the Board and
Board and Executive Vice Executive Vice President,
President, Industrial and Industrial and Consumer Sector
Consumer Markets and and Corporate Services, 1996-1998
Corporate Services Executive Vice President,
Industrial and Consumer Sector
and Corporate Services, 1991-1995
J. Marc Adam 59 Vice President, Marketing 1995 Group Vice President, Medical
Products Group, 1991-1995
Giulio Agostini 63 Senior Vice President, 1993 Senior Vice President,
Finance and Finance, 1991-1993
Administrative Services
Ronald O. Baukol 60 Executive Vice President, 1995 Vice President, Asia Pacific,
International Operations Canada and Latin America, 1994-1995
Vice President, Asia Pacific, 1991-1994
John W. Benson 53 Executive Vice President, 1998 Group Vice President, Industrial
Health Care Markets Markets Group, 1996-1997
Group Vice President, Abrasive,
Chemical and Film Products Group, 1995
Division Vice President, Abrasive
Systems Division, 1995
Managing Director, 3M United Kingdom PLC,
and Managing Director, 3M Ireland Ltd.,
1992-1995
William E. Coyne 61 Senior Vice President, 1996 Vice President, Research and
Research and Development Development, 1994-1995
President and General Manager,
3M Canada, Inc., 1990-1994.
M. Kay Grenz 51 Vice President, 1998 Staff Vice President, Human Resources
Human Resources Consulting and Resource Services,
1996-1998
Staff Vice President, Human Resources
Corporate Services, 1992-1996
Charles E. Kiester 61 Senior Vice President, 1993 Vice President, Engineering,
Engineering, Quality and Quality and Manufacturing Services
Manufacturing Services 1990-1993
W. George Meredith 54 Executive Vice President, 1998 Executive Vice President, Life Sciences
Corporate Services and Sector and Corporate Services, 1995-1997
Supply Chain Management Group Vice President, Pharmaceuticals,
Dental and Personal Care Products
Group, 1994
Group Vice President, Pharmaceuticals,
Dental and Disposable Products
Group, 1991-1994
Raymond C. Richelsen 56 Executive Vice President, 1998 Group Vice President, Traffic and
Transportation, Safety and Personal Safety Markets Group, 1997
Chemical Markets Vice President and General Manager,
National Advertising Company and
Media Networks, Inc., 1996
Group Vice President, Audio and
Video Products Group, 1995-1996
Group Vice President, Memory
Technologies Group, 1991-1995
John J. Ursu 58 Senior Vice President, 1997 Vice President, Legal Affairs and
Legal Affairs and General Counsel, 1993-1996
General Counsel General Counsel, 1992-1993
</TABLE>
<PAGE> 7
Item 2. Properties.
3M's general offices, corporate research laboratories, some division
laboratories and certain manufacturing facilities are located in St. Paul,
Minnesota. In the United States, 3M has 30 sales offices and distribution
centers in 20 states and operates 69 manufacturing facilities in 24 states.
Internationally, 3M has 215 sales offices and distribution centers. The company
operates 96 manufacturing and converting facilities in 44 countries outside the
United States.
3M owns substantially all of its physical properties. 3M's physical facilities
are highly suitable for the purposes for which they were designed.
Item 3. Legal Proceedings.
The company and certain of its subsidiaries are named as defendants in a number
of actions, governmental proceedings and claims, including environmental
proceedings and products liability claims involving products now or formerly
manufactured and sold by the company. In some actions, the claimants seek
damages as well as other relief, which, if granted, would require substantial
expenditures. The company has accrued certain liabilities, which represent
reasonable estimates of its probable liabilities for these matters. The company
also has recorded receivables for the probable amount of insurance recoverable
with respect to these matters.
Some of these matters raise difficult and complex factual and legal issues, and
are subject to many uncertainties, including, but not limited to, the facts and
circumstances of each particular action; the jurisdiction and forum in which
each action is proceeding; and differences in applicable law. Accordingly, the
company is not always able to estimate the amount of 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. (NOTE: This paragraph applies to all legal
proceedings involving the company except the breast implant litigation, which is
discussed separately in the next section.)
<PAGE> 8
Breast implant litigation
As of December 31, 1997, the company had been named as a defendant, often with
multiple co-defendants, in 7,547 lawsuits and 285 claims in various courts, all
seeking damages for personal injuries from allegedly defective breast implants.
These claims and lawsuits purport to represent 26,193 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 also may seek certain types of equitable relief, including
requiring the company to fund the costs associated with removal of the breast
implants.
A number of breast implant claims and lawsuits seek to impose liability on the
company under various theories for personal injuries allegedly caused by breast
implants manufactured and sold by manufacturers other than the company. These
manufacturers include, but are not limited to, McGhan Medical Corporation and
manufacturers that are no longer in business or that are insolvent, whose breast
implants may or may not have been used in conjunction with implants manufactured
and sold by the company. These claims raise many difficult and complex factual
and legal issues that are subject to many uncertainties, including the facts and
circumstances of each particular claim, the jurisdiction in which each suit is
brought, and differences in applicable law and insurance coverage.
A number of breast implant lawsuits seek to recover punitive damages. Any
punitive damages that may be awarded against the company may or may not be
covered by certain insurance policies depending on the language of the insurance
policy, applicable law and agreements with insurers.
In addition to 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 of Orleans, 92-2589)
has been decertified by the trial court. Plaintiffs' writ for a discretionary
appeal from the decertification is pending in the Fourth Circuit Court of
Appeals for Louisiana.
<PAGE> 9
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 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.
<PAGE> 10
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, the company believes that approximately 88% of
those claimants who filed current claims have elected to participate in the
Revised Settlement Program. It is still unknown as to what disease criteria all
claimants have satisfied, and what options they have chosen. As a result, the
total amount and timing of the company's prospective payments under the Revised
Settlement Program cannot be determined with precision at this time. As of
December 31, 1997, the company has paid $162 million into the court-administered
fund as a reserve against costs of claims payable by the company under the
Revised Settlement Program (including a $5 million administrative assessment).
Additional payments will be made as necessary. Payments to date have been
consistent with the company's estimates of total liability for these claims.
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 $699
million as of December 31, 1997, for defense and other costs and settlements
with litigants and claimants, the company had accrued liabilities of $292
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
<PAGE> 11
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 in 1996, the
court granted 3M partial declaratory judgment on the question of when insurance
coverage is "triggered." The court also granted the insurers' motion for
partial declaratory judgment on the question of the allocation method to be
applied in the case. In July 1997, the trial court ruled further on the trigger
issue and on the general allocation method. That ruling was consistent with and
further supported the company's opinion as stated in the following paragraph.
In November 1997, upon reconsideration, the court reversed a portion of its July
ruling and reinstated a portion of its previous ruling. The company believes
that conflicting rulings now exist that need to be clarified by the court and
reconciled with applicable law. Motions to clarify the allocation methodology
of triggered policies under these rulings are pending. Court options include
clarification, further trial followed by additional rulings, or certification
for interlocutory (while the case is still pending) appeal.
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 and potentially material insurance coverage for breast implant
claims. (See discussion of the accrued receivables for insurance recoveries
below.)
As of December 31, 1997, the company had accrued receivables for insurance
recoveries of $666 million, substantially all of which is contested by the
insurance carriers. Various factors could affect the timing and amount of
proceeds to be received under the company's various insurance policies,
including (i) the timing of payments made in settlement of claims; (ii) the
outcome of occurrence insurance litigation in the courts of Minnesota (as
<PAGE> 12
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 estimates of the probable liabilities, associated expenses
and probable insurance recoveries related to the breast implant claims are based
on the facts and circumstances existing at this time. New developments may occur
that could affect the company's estimates of probable liabilities (including
associated expenses) and the probable amount of insurance recoveries. These
developments include, but are not limited to, (i) the ultimate Fixed Amount
Benefit distribution of claimants in the Revised Settlement Program; (ii) the
success of and costs to the company in defending opt-out claims, including
claims involving breast implants not manufactured or sold by the company; (iii)
the outcome of the occurrence insurance litigation 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 estimates 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 and recoveries beyond the
current estimates of probable amounts. As new developments occur, these
estimates may be revised, or additional charges may be necessary to reflect the
impact of these developments on the costs to the company of resolving breast
implant litigation, claims, and insurance recoveries. Such revisions or
additional future charges could have a material adverse impact on the company's
net income in the quarterly period in which they are recorded. Although the
company considers it unlikely, such revisions or additional future charges could
also have a material adverse effect on the consolidated financial position 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, it is probable that the
collectible coverage provided by its applicable insurance policies is sufficient
to cover substantially all of its current exposure for breast implant claims and
defense costs. Based on the availability of this insurance coverage, the
company believes that its uninsured financial exposure has not materially
changed since the first quarter of 1994. Therefore, no recognition of additional
charges has been made.
Environmental Matters
The company 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.
<PAGE> 13
Item 4. Submission of Matters to a Vote of Security Holders.
None in the quarter ended December 31, 1997.
Part II
Item 5. Market Price of 3M's Common Stock and Related Security Holder Matters.
At January 31, 1998, there were 138,282 shareholders of record.
3M's stock is listed on the New York Stock Exchange, Pacific Exchange, Chicago
Stock Exchange, Amsterdam Stock Exchange, Swiss stock exchanges and Tokyo Stock
Exchange.
Stock price comparisons are provided in the Quarterly Data section in the Notes
to Consolidated Financial Statements.
<TABLE>
Item 6. Selected Financial Data.
(Dollars in millions, except per share amounts)
<CAPTION>
Year Ended December 31: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Sales............................ $15,070 $14,236 $13,460 $12,148 $11,053
Income from Continuing Operations.......2,121* 1,516 1,306** 1,207 1,133
Per Share of Common Stock:
Continuing Operations - Basic..........5.14* 3.63 3.11** 2.85 2.61
Continuing Operations - Diluted........5.06* 3.59 3.09** 2.84 2.59
Cash Dividends Declared and Paid....$ 2.12 $ 1.92 $ 1.88 $ 1.76 $ 1.66
Ratio of Earnings to Fixed Charges......21.58* 16.59 12.41** 13.96 15.93
At December 31:
Total Assets #........................$13,238 $13,364 $14,183 $13,068 $11,795
Long-Term Debt (excluding portion due
within one year)......................1,015 851 1,203 1,031 796
<FN>
<F1>
* 1997 includes a gain on the sale of National Advertising Company of $803
million ($495 million after-tax, or $1.20 per basic share and $1.18 per
diluted share).
<F2>
**1995 includes a restructuring charge of $79 million ($52 million after-tax, or
12 cents per basic and diluted share).
<F3>
# Periods prior to 1996 include net assets of discontinued operations.
<F4>
Each of the above items are discussed in the Notes to Consolidated Financial
Statements.
</FN>
</TABLE>
<PAGE> 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Operating Results
In November 1995, the Board of Directors approved a plan to launch the company's
data storage and imaging businesses as an independent, publicly owned company
and to discontinue 3M's audio and video business. As a result, these businesses
are presented as discontinued operations in the financial statements and notes.
The following discussion represents continuing operations and basic earnings per
share, except where otherwise noted.
Sales in 1997 rose 5.9 percent to $15.070 billion. This followed increases of
5.8 percent in 1996 and 10.8 percent in 1995. Sales growth in both 1997 and
1996 was held back by the stronger U.S. dollar.
In the United States, sales totaled $7.242 billion, up about 9 percent from
1996. Volume rose 9 percent, well above the growth of the U.S. economy.
Internationally, sales increased about 3 percent to $7.828 billion. Volume rose
13 percent, the fourth consecutive year of double-digit gains abroad. The
stronger U.S. dollar reduced international sales by about 9 percent. Selling
prices worldwide were basically flat, following a 1 percent increase in 1996.
<TABLE>
Components of Sales Change
<CAPTION>
1997 1996
U.S. Intl. Worldwide U.S. Intl. Worldwide
<S> <C> <C> <C> <C> <C> <C>
Volume 9% 13% 11% 6% 10% 8%
Price 0 (1) 0 1 1 1
Translation - (9) (5) - (6) (3)
Total 9% 3% 6% 7% 5% 6%
</TABLE>
Cost of goods sold was 57.0 percent of sales, up slightly from 1996. In both
1997 and 1996, gross margins benefited from volume growth, productivity gains
and slightly lower raw material costs, but were negatively affected by the
stronger U.S. dollar. Cost of goods sold includes manufacturing, research and
development, and engineering expenses.
Selling, general and administrative expenses were 25.3 percent of sales, down
from 25.6 percent in both 1996 and 1995. Solid volume gains, together with
continued emphasis on cost control and productivity improvement, had a positive
effect on this spending.
<TABLE>
<CAPTION>
(Percent of sales) 1997 1996 1995
<S> <C> <C> <C>
Cost of goods sold 57.0 56.9 57.3
Selling, general and administrative expenses 25.3 25.6 25.6
</TABLE>
In 1995, 3M recorded one-time, pre-tax charges of $653 million related to the
spin-off of the data storage and imaging businesses and the discontinuance of
the audio and video business. Of this amount, $79 million related to
restructuring in continuing operations and is reported separately on the
Consolidated Statement of Income. The remaining charges related to discontinued
operations. These charges and discontinued operations are discussed in the Notes
to Consolidated Financial Statements.
Operating income totaled $2.675 billion, up 7.4 percent from 1996. Negative
currency effects reduced profits by 7.6 percent. Operating income was 17.7
percent of sales, up from 17.5 percent in 1996 and 17.1 percent (excluding the
$79 million restructuring charge) in 1995.
<PAGE> 15
In the United States, operating income increased 15 percent and profit margins
improved by almost one percentage point. In 1996, excluding the 1995
restructuring charge, U.S. operating income increased 13 percent and profit
margins improved by nearly one percentage point.
Internationally, operating income rose about 1 percent and profit margins
declined by three-tenths of a percentage point from 1996. Negative currency
effects reduced international profits by 15 percent and profit margins by about
1.1 percentage points. In 1996, excluding the 1995 restructuring charge,
operating income rose about 5 percent and profit margins were the same as in
1995. Currency effects reduced international profits in 1996 by 9 percent.
The company estimates that currency effects reduced worldwide operating income
by $189 million in 1997 and by $118 million in 1996.
<TABLE>
<CAPTION>
(Percent of sales) 1997 1996 1995
<S> <C> <C> <C>
Operating income 17.7 17.5 17.1*
<FN>
<F1>
* Excludes restructuring charge
</FN>
</TABLE>
Interest expense was $94 million, compared with $79 million in 1996 and $102
million in 1995. The increase in 1997 was due to several factors, including
slightly higher debt balances and higher interest rate resets on certain long-
term floating-rate issues. The decrease in 1996 reflected lower interest rates
and a reduction in debt.
Investment and other income was $56 million, compared with $67 million in 1996
and $49 million in 1995. Lower levels of cash and securities resulted in less
interest income in 1997. Higher cash and securities balances and improved
investment results drove the 1996 increase.
In 1997, the company realized a gain on the sale of National Advertising Company
of $803 million ($495 million after-tax). This sale is discussed further in the
Notes to Consolidated Financial Statements. The effect of this gain on 3M's
statement of income and tax rate is summarized below.
<TABLE>
Supplemental Consolidated Statement of Income Information (Unaudited)
Year ended December 31, 1997
<CAPTION>
(Millions, except Excluding Gain on Reported
per-share amounts) Divestiture Divestiture Total
<C> <S> <S> <S>
Income before income taxes
and minority interest $2,637 $ 803 $3,440
Provision for income taxes 933 308 1,241
Effective tax rate 35.4% 38.4% 36.1%
Minority interest 78 -- 78
Net income $1,626 $ 495 $2,121
Earnings per share - basic $ 3.94 $ 1.20 $ 5.14
Earnings per share - diluted $ 3.88 $ 1.18 $ 5.06
</TABLE>
3M's total effective tax rate for 1997 was 36.1 percent. Excluding the
divestiture, the worldwide effective income tax rate was 35.4 percent, down
slightly from 1996 and 1995. The gain on the sale of National Advertising
Company, a U.S. business, was taxed at a rate of 38.4 percent (federal statutory
rate of 35.0 percent and a net effective state tax rate of 3.4 percent).
Income from continuing operations totaled $2.121 billion, or $5.14 per share
($1.626 billion, or $3.94 per share, excluding the gain on divestiture),
<PAGE> 16
compared with $1.516 billion, or $3.63 per share, in 1996. Excluding the gain
on divestiture, per-share income was up 8.5 percent. In 1995, income from
continuing operations totaled $1.306 billion, or $3.11 per share ($1.358
billion, or $3.23 per share, excluding the 1995 restructuring charge). In 1996,
excluding the 1995 restructuring charge, earnings per share from continuing
operations increased 12.4 percent.
Net income totaled $2.121 billion, or $5.14 per share ($1.626 billion, or $3.94
per share, excluding the gain on divestiture), compared with $1.526 billion, or
$3.65 per share, in 1996. Excluding the gain on divestiture, per-share net
income was up 7.9 percent. In 1995, net income before one-time charges totaled
$1.390 billion, or $3.31 per share.
In 1997 and 1996, changes in the value of the U.S. dollar reduced income from
continuing operations by an estimated $112 million and $65 million, or 27 cents
per share and 15 cents per share, respectively. In 1995, currency effects
increased income from continuing operations by an estimated $45 million, or 10
cents per share. These estimates include the effect of translating profits from
local currencies into U.S. dollars; the impact of currency fluctuations on the
transfer of goods between 3M operations in the United States and abroad; and
transaction gains and losses in countries not considered to be highly
inflationary.
Economic profit totaled $720 million, a 14 percent increase from 1996. Return
on invested capital was 18.0 percent, an increase of seven-tenths of a
percentage point from 1996. Economic profit equals after-tax operating income,
less a charge for the operating capital employed in 3M's businesses. Return on
invested capital is after-tax operating income divided by average operating
capital.
At December 31, 1997, employment totaled 75,639 people, an increase of 1,350
from year-end 1996. Sales per employee in local currencies increased about 10
percent. During the preceding three years, 3M's productivity increased an
average of about 9 percent a year.
Performance by Business Sector
Financial information and other disclosures relating to 3M's two business
segments is provided in the Notes to Consolidated Financial Statements.
Industrial and Consumer Sector:
This sector represented 63 percent of sales and 62 percent of operating income
in 1997. Sales totaled $9.484 billion, up 6.2 percent from 1996. Operating
income increased 7.2 percent to $1.662 billion. Operating income was 17.5
percent of sales.
This sector develops, manufactures and markets innovative, high-value products
for home, office and industrial customers around the world. Key industrial
products include tapes, adhesives, abrasives, specialty chemicals, resins,
electrical connectors, and microflex circuits. Many of the sector's new product
developments serve fast-growing industries, including semiconductors,
electronics, specialty chemicals, personal computers and energy management. Key
consumer and office supply products include tapes, notes, scouring pads and
sponges, fabric protectors, energy-saving products and floor matting.
Life Sciences Sector:
This sector represented 37 percent of sales and 40 percent of operating income
in 1997. Sales totaled $5.496 billion, up 4.9 percent from 1996. Operating
income decreased 2.3 percent to $1.066 billion. Operating income was 19.4
percent of sales.
<PAGE> 17
This sector produces innovative products that contribute to health and safety
for people around the world. In health care, this sector produces medical and
surgical supplies, health care information systems, pharmaceuticals and drug-
delivery systems, and dental products. In the safety area, this sector produces
reflective materials for traffic safety and respirators for worker protection.
This sector also produces closures for disposable diapers and equipment and
materials for premium indoor and outdoor graphics. On August 15, 1997, the
company sold National Advertising Company, an outdoor and mall advertising
subsidiary that was part of this sector. National Advertising Company had
annual sales of about $200 million and operating income of about $35 million.
The gain on this sale is not reflected in the sector's operating income results.
Performance by Geographic Area
Financial information relating to 3M operations in various geographic areas is
provided in the Notes to Consolidated Financial Statements.
United States (48% of sales, 48% of operating income)
In the United States, sales rose about 9 percent, driven by solid volume growth
and productivity gains. Operating income was 17.8 percent of sales, up nearly
one percentage point from 1996.
Europe and Middle East (24% of sales, 16% of operating income)
Unit sales in Europe and the Middle East increased about 11 percent, well above
the rate of economic growth in the area. Sales totaled $3.6 billion. Selling
prices declined slightly, while currency translation reduced sales by almost 10
percent.
In Western Europe, faster commercialization of new products and a market-focused
approach to customers are driving 3M growth. Volume rose about 10 percent, with
good gains in most countries. In Eastern Europe and the Middle East, the
company continues to grow rapidly, with particularly strong gains in Turkey,
Poland, Hungary and Russia.
Asia Pacific (18% of sales, 23% of operating income)
Continuing a record of solid gains, unit sales in the Asia Pacific area
increased about 12 percent in 1997. Selling prices decreased slightly, while
currency translation reduced sales by about 10 percent. In Japan, home of 3M's
largest international company, volume rose about 8 percent, well above the
country's economic growth rate. 3M's growth in Japan is benefiting from a
strong flow of new products.
Unit sales in Asia, excluding Japan, rose 23 percent in 1997. 3M companies in
Singapore, China, Hong Kong and India paced growth. Toward the end of 1997,
volume growth was tempered by economic and financial turmoil in several
countries. Although such turmoil may continue to affect volume growth in the
near-term, the company is confident in the long-term economic strength of the
region.
Latin America, Canada and Africa (10% of sales, 13% of operating income)
In Latin America, unit sales increased 18 percent, continuing a record of strong
gains. Freer trade in Latin America is enabling 3M to add significantly to
product lines and to deliver goods more efficiently. Near the end of 1997, the
company felt the effects of economic slowing in Brazil. With 3M's long
experience and strong management in Latin America, the company expects to
minimize the effects of economic disruptions on growth and maintain or enhance
market positions.
<PAGE> 18
In Canada, unit sales increased about 6 percent, driven by new products, key-
account relationships and a sharp customer focus. In Africa, volume increased
about 5 percent, led by industrial and health care products.
Financial Position
3M's financial condition remained strong in 1997, and working capital remained
well-controlled. The accounts receivable index was 58 days, down two days from
year-end 1996. The company's key inventory index was 3.8 months, unchanged from
year-end 1996. The current ratio was 1.5, down from 1.8 at year-end 1996.
Total debt was $2.514 billion, up from $1.968 billion at year-end 1996. Total
debt was 30 percent of total capital, compared with 24 percent in 1996. Of debt
outstanding at the end of 1997, $378 million represented a guarantee of debt of
the 3M Employee Stock Ownership Plan.
Various assets and liabilities, including cash and short-term debt, can
fluctuate significantly on a month-to-month basis depending on short-term
liquidity needs.
Legal proceedings are discussed in the Legal Proceedings section in Part I, Item
3, of this Form 10-K. 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. (NOTE: This paragraph
applies to all legal proceedings involving the company except the breast implant
litigation. See discussion of breast implant litigation in Legal Proceedings,
Part I, Item 3.)
Financial Instruments
The company enters into contractual arrangements (derivatives) in the ordinary
course of business to manage foreign currency exposure, interest rate risks and
commodity price risks. A financial risk management committee, composed of
senior management, provides oversight for risk management and derivative
activities. This committee determines the company's financial risk policies and
objectives and provides guidelines for derivative instrument utilization. This
committee also establishes procedures for control and valuation, risk analysis,
counterparty credit approval, and ongoing monitoring and reporting.
The company enters into forward contracts and swaps to hedge certain
intercompany financing transactions, and purchases foreign currency options to
hedge against the effect of exchange rate fluctuations on cash flows denominated
in non-U.S. dollars.
The company manages interest expense using a mix of fixed, floating and variable
rate debt. To help manage borrowing costs, the company may enter into interest
rate swaps. Under these arrangements, the company agrees to exchange, at
specified intervals, the difference between fixed and floating interest amounts
calculated by reference to an agreed-upon notional principal amount.
The company manages commodity price risks through negotiated supply contracts,
price protection swaps, and forward physical contracts.
A variance/co-variance value-at-risk model was used to test the company's
exposure to changes in currency and interest rates. A historical value-at-risk
model was used to assess commodity risks. All models used a 95 percent
confidence level over a one month time horizon. The JP Morgan Riskmetrics
<PAGE> 19
dataset was used for the variance/co-variance analysis. Five years of
historical data were used for the commodity risk analysis. Both models assessed
the risk of loss in market value of outstanding financial instruments and
derivatives. Based on a value-at-risk analysis of the company's foreign
exchange, interest rate and commodity derivative instruments outstanding at
December 31, 1997, probable near-term changes in exchange rates, interest rates
or commodity prices would not materially affect the company's consolidated
financial position, results of operations or cash flows.
Liquidity
During 1997, cash flows provided by operating activities of continuing
operations totaled $1.818 billion, down from $2.041 billion in 1996. In 1997,
operating cash flows were negatively impacted by $308 million of income taxes
paid relating to the gain on the sale of National Advertising Company.
Operating cash flows were helped by net inflows of $35 million relating to
breast implant litigation, compared with net outflows of $275 million in 1996.
In both 1997 and 1996, cash flows were helped by solid operating results and
good asset management.
Capital spending totaled $1.406 billion, an increase of about 27 percent from
1996. This followed increases of 2 percent in 1996 and 12 percent in 1995.
These investments are helping to meet growing global demand for 3M products and
to increase manufacturing efficiency.
Cash used for acquisitions and investments totaled $40 million, $263 million and
$49 million in 1997, 1996 and 1995, respectively. The increase in 1996
primarily was due to acquisitions in the health care field and the purchase of
the minority interest in 3M Korea.
Cash proceeds from the sale of National Advertising Company totaled $1 billion,
with net after-tax cash proceeds of nearly $700 million. Cash proceeds from
other divestitures and investments totaled $51 million, $62 million and $82
million in 1997, 1996 and 1995, respectively.
Stockholder dividends increased 10.4 percent to $2.12 a share. Cash dividend
payments totaled $876 million. 3M has paid dividends since 1916. In February
1998, the Board of Directors increased the quarterly dividend on 3M common stock
to 55 cents a share, equivalent to an annual dividend of $2.20 a share, a 3.8
percent increase from 1997. This marks the 40th consecutive yearly increase.
Repurchases of 3M common stock totaled $1.693 billion in 1997, compared with
$532 million in 1996 and $351 million in 1995. Net proceeds from the National
Advertising Company divestiture were used primarily to repurchase shares.
Repurchases were made to support employee stock purchase plans and for other
corporate purposes.
In November 1997, the Board of Directors authorized the repurchase of up to 25
million of the company's shares. This share repurchase authorization extends
through December 31, 1998. Under a preceding authorization, the company
purchased about 17.5 million shares.
The company's strong credit rating provides ready and ample access to funds in
global capital markets. In February 1998, the company issued $330 million of 30-
year, 6.375 percent debentures. The company's net effective all-in borrowing
cost is 6.46 percent. This issuance exhausted 3M's $600 million shelf
registration with the Securities and Exchange Commission. At year-end 1997, the
company had available short-term lines of credit totaling about $300 million.
<PAGE> 20
Timing differences between payment of implant liabilities and receipt of related
insurance recoveries could affect future cash flows. This is discussed in Part
I, Item 3, Legal Proceedings, of this Form 10-K.
Future Outlook
3M expects solid sales and earnings growth again in 1998, even though the strong
U.S. dollar will continue to affect the company, particularly in the first half
of the year. Based on exchange rates at the end of January 1998, currency
effects could reduce 1998 earnings by more than 25 cents per share, with the
largest impact expected during the first quarter of 1998.
The company is not able to project what all the consequences of the turmoil in
Asia may be. Entering 1998, the company is monitoring business conditions
closely and is prepared to make adjustments in costs, pricing and investments as
appropriate. Overall, the company does not expect any contributions to earnings
growth from Asia in 1998. In Brazil, business activity slowed in late 1997, and
a sluggish economy is expected during the first half of 1998.
Strong market positions, innovative new products and successful customer-
satisfaction efforts should set the stage for continued solid volume gains. The
company's results also will benefit from strong emphasis on productivity
improvement, cost control and asset management.
3M has an 8 percent annual productivity improvement objective, as measured by
sales growth per employee in local currencies. Employment levels within the
company are expected to be consistent with this objective.
Through continued repurchases, the company expects to reduce shares outstanding
to 390 million by year-end 1998. The company estimates total debt could
increase from an average of about $2 billion in 1997 to more than $3 billion, on
average, in 1998. This strategy may add up to $70 million in interest expense
(before taxes) in 1998. The company does not anticipate a significant change in
its tax rate in 1998.
Capital spending is expected to remain at about $1.4 billion dollars in 1998,
assuming economic conditions and demand for 3M products are not stronger than
expected.
Impact of the Year 2000 Issue
The company recognizes the importance of the Year 2000 issue and has been giving
high priority to it. In November 1996, the company created a corporate-wide
Year 2000 project team representing all business and staff units of the company.
The team's objective is to ensure an uninterrupted transition into the Year
2000. The scope of the Year 2000 readiness effort includes software, hardware,
electronic data interchange (EDI), manufacturing and lab equipment,
environmental and safety systems, facilities, utilities, supplier readiness and
3M products with date-sensitivity. If necessary modifications and conversions
are not made on a timely basis, the Year 2000 issue could have a material
adverse effect on the operations of the company.
The company is utilizing both internal and external resources to remediate and
test millions of lines of application software code. The target is to complete
the most serious Year 2000 compliance issues for U.S. information systems by
July 1998 and for international information systems by December 1998. The
company expects to complete all other potential Year 2000 compliance issues by
July 1999.
<PAGE> 21
In addition to internal Year 2000 software and equipment remediation activities,
the company is in contact with its suppliers and electronic commerce customers
to assess their compliance. There can be no absolute assurance that there will
not be a material adverse effect on the company if third parties do not convert
their systems in a timely manner and in a way that is compatible with the
company's systems. The company believes that its diligent actions with
suppliers and customers will minimize these risks.
The vast majority of the company's products are not date-sensitive. The company
is collecting information on current and discontinued date-sensitive products.
This information is expected to be available to customers in mid-March 1998.
Through 1997, the company had expensed incremental costs of $15 million related
to the Year 2000 issue. The total remaining incremental cost is estimated to be
$55 million. The company is expensing as incurred all costs related to the
assessment and remediation of the Year 2000 issue. These costs are being funded
through operating cash flows. The company's total cost for the Year 2000 issue
includes estimated costs and time associated with interfacing with third
parties' Year 2000 issues. These estimates are based on currently available
information.
The company's current estimates of the amount of time and costs necessary to
remediate and test its computer systems are based on the facts and circumstances
existing at this time. The estimates were derived utilizing multiple
assumptions of future events including the continued availability of certain
resources, third-party modification plans and implementation success, and other
factors. New developments may occur that could affect the company's estimates
of the amount of time and costs necessary to modify and test its systems for
Year 2000 compliance. These developments include, but are not limited to: (i)
the availability and cost of personnel trained in this area; (ii) the ability to
locate and correct all relevant computer code and equipment, and (iii) the
planning and modification success attained by 3M's business partners.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. This Annual Report on Form 10-K
contains forward-looking statements, which reflect the Company's current views
with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "aim",
"believe", "expect", "anticipate", "intend", "estimate" and other expressions
which 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, particularly in Brazil and
the Asia Pacific region; raw materials, including shortages and increases in the
costs of key raw materials; impact of the Year 2000 issue (see discussion of the
Year 2000 issue in Part I, Item 7 of this Form 10-K); and legal proceedings (see
discussion of Legal Proceedings in Part I, Item 3 of this Form 10-K).
<PAGE> 22
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Reference (pages)
Form 10-K
Data submitted herewith:
Report of Independent Auditors ............................... 23
Consolidated Statement of Income for the years ended
December 31, 1997, 1996 and 1995 ........................... 24
Consolidated Balance Sheet at December 31, 1997 and
1996 ....................................................... 25
Consolidated Statement of Changes in Stockholders'
Equity for the years ended December 31, 1997,
1996 and 1995 .............................................. 26
Consolidated Statement of Cash Flows
for the years ended December 31,
1997, 1996 and 1995 ........................................ 27
Notes to Consolidated Financial Statements ..................28-43
<PAGE> 23
Report of Independent Auditors
To the Stockholders of Minnesota Mining and Manufacturing Company:
We have audited the consolidated financial statements of Minnesota Mining and
Manufacturing Company and Subsidiaries as listed in Item 8 of this Form 10-K.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Minnesota Mining
and Manufacturing Company and Subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
St. Paul, Minnesota
February 9, 1998, except for
the last paragraph under Debt
in the Notes to Consolidated
Financial Statements, as to which
the date is February 18, 1998.
<PAGE> 24
<TABLE>
Consolidated Statement of Income
Minnesota Mining and Manufacturing Company and Subsidiaries
<CAPTION>
Years ended December 31 1997 1996 1995
(Amounts in millions, except per-share amounts)
<S> <C> <C> <C>
Net sales $15,070 $14,236 $13,460
Operating expenses
Cost of goods sold 8,580 8,099 7,720
Selling, general and administrative expenses 3,815 3,646 3,440
Restructuring charge -- -- 79
Total 12,395 11,745 11,239
Operating income 2,675 2,491 2,221
Other income and expense
Interest expense 94 79 102
Investment and other income - net (56) (67) (49)
Gain on divestiture - net (803) -- --
Total (765) 12 53
Income from continuing operations before income taxes
and minority interest 3,440 2,479 2,168
Provision for income taxes 1,241 886 785
Minority interest 78 77 77
Income from continuing operations 2,121 1,516 1,306
Discontinued operations
Income from operations of discontinued businesses,
net of income taxes -- -- 43
Gain (loss) on disposal of discontinued businesses,
net of income taxes -- 10 (373)
Net income $ 2,121 $ 1,526 $ 976
Earnings per share - basic
Income from continuing operations $ 5.14 $ 3.63 $ 3.11
Net income $ 5.14 $ 3.65 $ 2.32
Weighted average common shares outstanding 412.7 418.2 419.8
Earnings per share - diluted
Income from continuing operations $ 5.06 $ 3.59 $ 3.09
Net income $ 5.06 $ 3.62 $ 2.31
Weighted average common and
common equivalent shares outstanding 418.7 422.1 422.5
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements are an integral part of
this statement.
</FN>
</TABLE>
<PAGE> 25
<TABLE>
Consolidated Balance Sheet
Minnesota Mining and Manufacturing Company and Subsidiaries
<CAPTION>
At December 31 1997 1996
(Dollars in millions)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 230 $ 583
Other securities 247 161
Accounts receivable - net 2,434 2,504
Inventories 2,399 2,264
Other current assets 858 974
Total current assets 6,168 6,486
Investments 613 585
Property, plant and equipment - net 5,034 4,844
Other assets 1,423 1,449
Total $13,238 $13,364
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 898 $ 895
Payroll 306 300
Income taxes 238 201
Short-term debt 1,499 1,117
Other current liabilities 1,042 1,093
Total current liabilities 3,983 3,606
Other liabilities 2,314 2,623
Long-term debt 1,015 851
Stockholders' equity - net 5,926 6,284
Shares outstanding - 1997: 404,724,947
1996: 416,836,008
Total $13,238 $13,364
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements are an integral part of
this statement.
</FN>
</TABLE>
<PAGE> 26
<TABLE>
Consolidated Statement of Changes in Stockholders' Equity
Minnesota Mining and Manufacturing Company and Subsidiaries
<CAPTION>
Years ended December 31 1997 1996 1995
(Dollars in millions, except per-share amounts)
<S> <C> <C> <C>
Common stock
Balance at beginning of year $ 296 $ 296 $ 296
Transfer to capital in excess of par value (60) -- --
Balance at end of year 236 296 296
Capital in excess of par value
Balance at beginning of year -- -- --
Transfer from common stock 60 -- --
Balance at end of year 60 -- --
Retained earnings
Balance at beginning of year 8,756 9,164 9,039
Net income 2,121 1,526 976
Dividends paid (per share: $2.12, $1.92, $1.88) (876) (803) (790)
Special dividend of Imation Corp. common stock -- (1,008) --
Stock option and benefit plans (153) (123) (61)
Balance at end of year 9,848 8,756 9,164
Unearned compensation - ESOP
Balance at beginning of year (412) (437) (460)
Amortization 33 25 23
Balance at end of year (379) (412) (437)
Cumulative translation - net
Balance at beginning of year (178) (102) (163)
Translation and other adjustments (369) (122) 61
Adjustment for Imation Corp. special dividend -- 46 --
Balance at end of year (547) (178) (102)
Debt and equity securities, unrealized gain(loss) - net
Balance at beginning of year 15 16 (3)
Fair value adjustments (7) (1) 19
Balance at end of year 8 15 16
Treasury stock, at cost
Balance at beginning of year (2,193) (2,053) (1,975)
Reacquired stock (millions of shares: 18.7, 7.6, 5.9) (1,693) (532) (351)
Issuances pursuant to stock option and
benefit plans (millions of shares: 6.6, 5.7, 4.8) 586 392 273
Balance at end of year (3,300) (2,193) (2,053)
(millions of shares: 67.3, 55.2, 53.3)
Stockholders' equity - net $ 5,926 $ 6,284 $ 6,884
<FN>
<F1>
Common stock ($.50 par value per share; without par value at December 31, 1996
and 1995) of 1 billion shares is authorized, with 472,016,528 shares issued in
1997, 1996 and 1995. Preferred stock, without par value, of 10 million shares
is authorized but unissued.
<F2>
The accompanying Notes to Consolidated Financial Statements are an integral part of
this statement.
</FN>
</TABLE>
<PAGE> 27
<TABLE>
Consolidated Statement of Cash Flows
Minnesota Mining and Manufacturing Company and Subsidiaries
<CAPTION>
Years ended December 31 1997 1996 1995
(Dollars in millions)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 2,121 $1,526 $ 976
Less income (loss) from discontinued operations -- 10 (330)
Income from continuing operations 2,121 1,516 1,306
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities
Gain on divestiture - net (495) -- --
Income tax paid relating to divestiture (308) -- --
Implant litigation - net 35 (275) (112)
Depreciation 800 825 795
Amortization 70 58 64
Accounts receivable (149) (170) (90)
Inventories (295) (75) (51)
Other - net 39 162 23
Net cash provided by continuing operations 1,818 2,041 1,935
Net cash (used) provided by discontinued operations (112) 170 325
Net cash provided by operating activities 1,706 2,211 2,260
Cash Flows from Investing Activities
Capital expenditures (1,406) (1,109) (1,088)
Proceeds from sale of property, plant and equipment 38 66 54
Acquisitions and other investments (40) (263) (49)
Proceeds from National Advertising Company divestiture 1,000 -- --
Proceeds from other divestitures and investments 51 62 82
Discontinued operations - net -- (17) (207)
Net cash used in investing activities (357) (1,261) (1,208)
Cash Flows from Financing Activities
Change in short-term debt - net 705 (76) (41)
Repayment of long-term debt (565) (15) (156)
Proceeds from long-term debt 337 173 223
Purchases of treasury stock (1,693) (532) (351)
Reissuances of treasury stock 355 268 214
Payment of dividends (876) (803) (790)
Other (22) 79 --
Net cash used in financing activities (1,759) (906) (901)
Effect of exchange rate changes on cash 57 54 37
Net (decrease) increase in cash and cash equivalents (353) 98 188
Cash and cash equivalents at beginning of year 583 485 297
Cash and cash equivalents at end of year $ 230 $ 583 $ 485
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements are an integral part of
this statement.
</FN>
</TABLE>
<PAGE> 28
Notes to Consolidated Financial Statements
Accounting Policies
Consolidation: All significant subsidiaries are consolidated. Unconsolidated
subsidiaries and affiliates are included on the equity basis.
Reclassifications: Certain reclassifications have been made to December 31,
1996, balance sheet amounts to conform to the current year presentation.
Foreign currency translation: Local currencies generally are considered the
functional currencies outside the United States, except in countries treated as
highly inflationary. Assets and liabilities for operations in local currency
environments are translated at year-end exchange rates. Income and expense
items are translated at average rates of exchange prevailing during the year.
Cumulative translation adjustments are recorded as a component of stockholders'
equity.
For operations in countries treated as highly inflationary, certain financial
statement amounts are translated at historical exchange rates, with all other
assets and liabilities translated at year-end exchange rates. These translation
adjustments are reflected in the results of operations and are not material.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and cash equivalents: Cash and cash equivalents consist of cash and
temporary investments with maturities of three months or less when purchased.
Other securities and investments: Other securities consist of marketable
securities and interest-bearing bank deposits with varied maturity dates. These
securities are employed in the company's banking, captive insurance and cash
management operations. Investments primarily include debt securities held by
captive insurance and banking operations; individual and commercial loans
receivable held by banking operations; the cash surrender value of life
insurance policies; and real estate and venture capital investments.
Inventories: Inventories are stated at lower of cost or market, with cost
generally determined on a first-in, first-out basis.
Other assets: Other assets include product and other insurance claims,
goodwill, patents, other intangibles, deferred taxes, and other noncurrent
assets. Goodwill generally is amortized on a straight-line basis over the
periods benefited, principally in the range of 10 to 40 years. Other intangible
items are amortized on a straight-line basis over their estimated economic
lives.
Revenue recognition: Revenue is recognized upon shipment of goods to customers
and upon performance of services. The company sells a wide range of products to
a diversified base of customers around the world and, therefore, believes there
is no material concentration of credit risk.
<PAGE> 29
Property, plant and equipment: Depreciation of property, plant and equipment
generally is computed on a straight-line basis over its estimated useful life.
Fully depreciated assets are retained in property and accumulated depreciation
accounts until removed from service. Upon disposal, assets and related
accumulated depreciation are removed from the accounts and the net amount, less
proceeds from disposal, is charged or credited to income.
Advertising and merchandising: These costs are charged to operations in the
year incurred.
Derivatives: 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 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.
Accounting for stock-based compensation: The company uses the intrinsic value
method for the Management Stock Ownership Program (MSOP). The General
Employees' Stock Purchase Plan (GESPP) is considered noncompensatory.
Earnings per share: Effective December 31, 1997, the company adopted Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," and has
disclosed basic and diluted earnings per share for all periods presented in
accordance with this standard. A dilutive effect on earnings results from the
assumed exercise of stock options outstanding under the GESPP and the MSOP.
Effective July 1997, GESPP options are exercised on the last business day of
each month of grant, resulting in no dilutive effect.
Comprehensive income: Effective in 1998, the company will adopt SFAS No. 130,
"Reporting Comprehensive Income." Due to the significant impact of currency
translation in 1997 and 1996, comprehensive income will be lower than net income
for those years. The impact of translation and other adjustments is disclosed
in the Consolidated Statement of Changes in Stockholders' Equity.
Business segments: Effective at year-end 1998, the company will adopt SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information." The
company is reviewing the requirements of this statement and believes that it
will change, to some degree, the nature and extent of its current business
segment disclosure. This statement does not impact the basic consolidated
financial statements; it affects the presentation of segment information in the
Notes to Consolidated Financial Statements.
<PAGE> 30
Gain on Divestiture
Effective August 15, 1997, the company sold National Advertising Company, an
outdoor and mall advertising subsidiary, 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 gain of $803 million ($495 million
after-tax) or $1.20 per basic share and $1.18 per diluted share. National
Advertising Company had annual sales of about $200 million and operating income
of about $35 million.
Discontinued Operations
In November 1995, the Board of Directors approved a plan to launch the company's
data storage and imaging businesses as an independent, publicly owned company
and to discontinue 3M's audio and video business. In June 1996, the Board of
Directors approved the tax-free distribution by 3M of the common stock of
Imation Corp. (Imation) as a special dividend of one share of Imation common
stock for every 10 shares of outstanding 3M common stock held of record as of
the close of business on June 28, 1996. The company recorded the special
dividend of Imation common stock by reducing retained earnings by $1.008
billion, which represented the carrying value of the net assets underlying the
common stock distributed. The company's consolidated financial statements and
notes report Imation and the audio and video business as discontinued
operations.
Income from operations of the discontinued businesses for 1995 includes results
through November 30, 1995. Income from operations of discontinued businesses
included interest expense allocations (based on the ratio of net assets of
discontinued operations to consolidated net assets plus debt) of $15 million in
1995.
The 1995 loss on disposal of $373 million included the estimated future results
of operations through the estimated date of spin-off or closure. Major
components of the loss on disposal include $300 million of severance costs and
$265 million of asset write-downs, net of deferred income taxes of $232 million.
The loss on disposal calculation included $13 million of interest expense. Net
cash provided by discontinued operations in 1995 differs from the loss from
discontinued operations principally due to two factors -- the loss on disposal
for which no cash had been expended at December 31, 1995, and depreciation. The
$10 million 1996 gain on disposal reflects final adjustments to the company's
1995 estimated loss on disposal.
<TABLE>
Discontinued Operations
<CAPTION>
(Millions) 1997 1996 1995
<S> <C> <C> <C>
Net sales $ -- $ -- $2,645
Income from operations, net of
income taxes of $23 million -- -- 43
Gain (loss) on disposal, net of income taxes -- 10 (373)
Total discontinued operations, net of income taxes $ -- $ 10 $ (330)
Per share - basic $ -- $.02 $ (.79)
Per share - diluted $ -- $.02 $ (.78)
</TABLE>
<PAGE> 31
Restructuring Charge
The company recorded a restructuring charge of $79 million in 1995 related to
the spin-off of the data storage and imaging businesses and the discontinuance
of the audio and video business. Major components of this charge included $50
million of employee severance costs and $17 million related to the write-down of
certain assets to net realizable value. In early 1997, about 1,000 people,
mainly in corporate service functions in the United States and Europe, left 3M
through voluntary separation programs. Substantially all payments related to
employee separations were made as of December 31, 1997.
<TABLE>
Supplemental Statement of Income Information
<CAPTION>
(Millions) 1997 1996 1995
<S> <C> <C> <C>
Research and development costs $1,002 $947 $883
Advertising and merchandising costs 471 459 423
</TABLE>
<TABLE>
Supplemental Balance Sheet Information
<CAPTION>
(Millions) 1997 1996
<S> <C> <C>
Accounts receivable
Accounts receivable $ 2,523 $ 2,609
Less allowances 89 105
Accounts receivable - net $ 2,434 $ 2,504
Inventories
Finished goods $ 1,293 $ 1,195
Work in process 605 591
Raw materials and supplies 501 478
Total inventories $ 2,399 $ 2,264
Other current assets
Product and other insurance claims $ 254 $ 419
Deferred income taxes 134 161
Other 470 394
Total other current assets $ 858 $ 974
Other securities and investments*
Held-to-maturity (amortized cost) $ 181 $ 68
Available-for-sale (fair value) 179 195
Other (cost, which approximates fair value) 500 483
Total other securities and investments $ 860 $ 746
Property, plant and equipment - at cost
Land $ 275 $ 299
Buildings and leasehold improvements 2,916 2,885
Machinery and equipment 8,178 8,449
Construction in progress 729 417
$12,098 $12,050
Less accumulated depreciation 7,064 7,206
Property, plant and equipment - net $ 5,034 $ 4,844
<FN>
<F1>
*Unrealized gains and losses relating to other securities and investments
classified as available-for-sale are included as a component of stockholders'
equity. Realized gains and losses in 1997 and 1996 were not material.
</FN>
</TABLE>
<PAGE> 32
<TABLE>
Supplemental Balance Sheet Information (continued)
<CAPTION>
(Millions) 1997 1996
<S> <C> <C>
Other assets
Product and other insurance claims $ 805 $ 859
Deferred income taxes 167 132
Other 451 458
Total other assets $ 1,423 $ 1,449
Other current liabilities
Product and other liabilities $ 202 $ 256
Severance and other restructuring liabilities -- 234
Deposits - banking operations** 128 118
Deferred income taxes 9 11
Other 703 474
Total other current liabilities $ 1,042 $ 1,093
Other liabilities
Product and other liabilities $ 698 $ 876
Minority interest in subsidiaries 361 373
Nonpension postretirement benefits 477 465
Deposits - banking operations** 249 238
Deferred income taxes 89 97
Other 440 574
Total other liabilities $ 2,314 $ 2,623
<FN>
<F1>
**Primarily demand deposits and, as such, the carrying amount approximates fair
value.
</FN>
</TABLE>
Supplemental Cash Flow Information
Income tax payments and interest payments included in the Consolidated Statement
of Cash Flows are shown below.
<TABLE>
<CAPTION>
(Millions) 1997 1996 1995
<S> <C> <C> <C>
Income tax payments $1,123 $761 $793
Interest payments 91 78 104
</TABLE>
Income tax payments in 1997 include $308 million related to the gain on the sale
of National Advertising Company.
In connection with the spin-off of the data storage and imaging businesses, the
company recorded cash proceeds of $79 million in 1996, primarily related to the
sale of international assets to Imation. Imation also retired $65 million of
short-term debt related to its businesses as of June 30, 1996.
In 1996, 3M increased its ownership in 3M Korea from 60 percent to 100 percent
by purchasing the remaining interest from minority shareholders. The purchase
price included the deferral of $72 million that is being paid in installments
over the period 1997 through 1999.
<PAGE> 33
Debt
<TABLE>
<CAPTION>
Short-Term Debt Effective
(Millions) Interest Rate* 1997 1996
<S> <C> <C> <C>
Commercial paper 5.58% $1,070 $ 353
Long-term debt - current portion 5.93% 163 555
Other borrowings 6.54% 266 209
Total short-term debt $1,499 $1,117
</TABLE>
<TABLE>
<CAPTION>
Long-Term Debt Effective Maturity
(Millions) Interest Rate* Date 1997 1996
<S> <C> <C> <C> <C>
ESOP debt guarantee 8.24% 1999-2004 $ 338 $ 378
U.S. dollar 6.625% Eurobond 5.48% 2001 250 --
German Mark 5% Euronote 5.59% 2001 165 165
Medium-term 6.25% note 5.34% 1999 100 100
Canadian 6.5% Eurobond -- 1998 -- 114
Other borrowings 5.67% 1999-2037 162 94
Total long-term debt $1,015 $ 851
<FN>
<F1>
*Effective interest rates reflect the effects of interest rate and currency
swaps at December 31, 1997.
</FN>
</TABLE>
Debt with fixed interest rates includes the ESOP, Canadian Eurobond and a
portion of other borrowings. ESOP debt is serviced by dividends on stock held
by the ESOP and by company contributions. These contributions are reported as
an employee benefit expense. Other borrowings include floating rate notes and
industrial bond issues in the United States and other borrowings by 3M's
international companies.
Maturities of long-term debt for the next five years are: 1998, $163 million;
1999, $146 million; 2000, $53 million; 2001, $477 million; and 2002, $64
million.
The company estimates that the fair value of short-term and long-term debt
approximates the carrying amount of this debt. Debt covenants do not restrict
the payment of dividends.
In February 1998, the company issued $330 million of 30-year, 6.375 percent
debentures. The company's net effective all-in borrowing cost is 6.46 percent.
This issuance exhausted 3M's $600 million shelf registration with the Securities
and Exchange Commission. At year-end 1997, the company had available short-term
lines of credit totaling about $300 million.
<PAGE> 34
Other Financial Instruments
Interest rate and currency swaps: The company uses interest rate and currency
swaps to manage interest rate risk related to borrowings. The notional amounts
set forth in the table below serve solely as a basis for the calculation of
payment streams to be exchanged. These notional amounts are not a measure of
the exposure of the company through its use of derivatives. These instruments
generally mature in relationship to their underlying debt and have maturities
extending to 2001. Unrealized gains and losses and exposure to changes in
market conditions were not material at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Notional Amounts
(Millions) 1997 1996
<S> <C> <C>
Interest rate swaps $514 $829
Currency swaps 452 426
</TABLE>
Foreign exchange forward and options contracts: The company has entered into
foreign exchange forward and options contracts, the majority of which have
maturities of less than one year. The face amounts represent contracted U.S.
dollar equivalents of forward and options contracts denominated in non-U.S.
dollars. The amounts at risk are not material because the company has the
ability to generate offsetting foreign currency cash flows. Unrealized gains
and losses at December 31, 1997 and 1996, were not material.
<TABLE>
<CAPTION>
Face Amounts
(Millions) 1997 1996
<S> <C> <C>
Forward contracts $966 $869
Options purchased 472 --
Options sold 123 --
</TABLE>
The company engages in foreign currency hedging activities to reduce exchange
risks arising from cross-border cash flows denominated in non-U.S. dollars. The
company operates on a global basis, generating more than half its revenues from
international customers and engaging in substantial product and financial
transfers among geographic areas. Major forward contracts at December 31, 1997,
were denominated in Dutch guilders, Japanese yen, Belgian francs, German marks
and Spanish pesetas.
Credit risk: The company is exposed to credit loss in the event of
nonperformance by counterparties in interest rate swaps, currency swaps, and
option and foreign exchange contracts, but does not anticipate nonperformance by
any of these counterparties. The company actively monitors its exposure to
credit risk through the use of credit approvals and credit limits, and by
selecting major international banks and financial institutions as
counterparties.
Leases
Rental expense under operating leases was $125 million in 1997, $138 million in
1996 and $154 million in 1995. The table below sets forth minimum payments
under operating leases with noncancelable terms in excess of one year, as of
December 31, 1997.
<TABLE>
<CAPTION>
After
(Millions) 1998 1999 2000 2001 2002 2002 Total
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum lease payments $60 $47 $33 $23 $18 $64 $245
</TABLE>
<PAGE> 35
Income Taxes
The gain on the sale of National Advertising Company, a U.S. business, was taxed
at a rate of 38.4 percent (federal statutory rate of 35.0 percent and a net
effective state tax rate of 3.4 percent). The information below reflects the
pre-tax gain of $803 million on the sale and related income taxes paid of $308
million.
<TABLE>
Income from Continuing Operations before Income Taxes and Minority Interest
<CAPTION>
(Millions) 1997 1996 1995
<S> <C> <C> <C>
United States $2,607 $1,534 $1,274
International 833 945 894
Total $3,440 $2,479 $2,168
</TABLE>
<TABLE>
Provision for Income Taxes
<CAPTION>
(Millions) 1997 1996 1995
<S> <C> <C> <C>
Currently payable
Federal $ 823 $ 331 $ 346
State 127 63 58
International 370 405 380
Deferred
Federal (57) 76 21
State (5) 7 2
International (17) 4 (22)
Total $1,241 $ 886 $ 785
</TABLE>
<TABLE>
Components of Deferred Tax Assets and Liabilities
<CAPTION>
(Millions) 1997 1996
<S> <C> <C>
Accruals currently not deductible
Benefit costs $247 $235
Severance and other restructuring costs -- 89
Product and other liabilities 343 431
Product and other insurance claims (404) (487)
Accelerated depreciation (243) (304)
Other 260 221
Net deferred tax asset $203 $185
</TABLE>
At December 31, 1997, approximately $2.606 billion of retained earnings
attributable to international companies were considered to be indefinitely
invested. No provision has been made for taxes that might be payable if these
earnings were remitted to the United States. It is not practical to determine
the amount of incremental taxes that might arise were these earnings to be
remitted.
<TABLE>
<CAPTION>
Reconciliation of Effective Income Tax Rate 1997 1996 1995
<S> <C> <C> <C>
Statutory U.S. tax rate 35.0% 35.0% 35.0%
State income taxes - net 2.3 1.8 1.8
International income taxes - net .2 .5 .5
All other - net (1.4) (1.5) (1.1)
Effective worldwide tax rate 36.1% 35.8% 36.2%
</TABLE>
<PAGE> 36
Business Segments
3M's businesses are organized into two sectors: Industrial and Consumer, and
Life Sciences. These sectors have worldwide responsibility for virtually all of
the company's product lines. These product lines serve a wide range of markets,
including automotive, communications, consumer, electronics, health care,
industrial, office, personal care and safety. 3M is not dependent on any single
product or market.
Financial information relating to the company's business sectors for the years
ended December 31, 1997, 1996 and 1995 appears below. 3M is an integrated
enterprise characterized by substantial intersector cooperation, cost
allocations and inventory transfers. Therefore, management does not represent
that these sectors, if operated independently, could earn the operating income
shown.
<TABLE>
<CAPTION>
Industrial Life Corporate and Total
(Millions) and Consumer Sciences Unallocated Company
<S> <S> <C> <C> <C> <C>
Net sales 1997 $9,484 $5,496 $ 90 $15,070
1996 8,928 5,242 66 14,236
1995 8,371 5,019 70 13,460
Operating 1997 $1,662 $1,066 $ (53)* $ 2,675
income 1996 1,551 1,091 (151)* 2,491
1995 1,327 1,065 (171)* 2,221
Identifiable 1997 $6,474 $3,894 $2,870 $13,238
assets ** 1996 6,054 3,858 3,452 13,364
1995 5,858 3,489 4,836 14,183
Depreciation 1997 $ 478 $ 301 $ 21 $ 800
1996 512 285 28 825
1995 503 272 20 795
Capital 1997 $ 851 $ 510 $ 45 $ 1,406
expenditures 1996 657 434 18 1,109
1995 613 447 28 1,088
<FN>
<F1>
* Operating income includes unallocated corporate overhead expenses, some of
which historically were allocated to discontinued operations. Operating income
for 1995 includes a $79 million restructuring charge.
<F2>
** Identifiable assets for business sectors primarily include accounts
receivable; inventory; net property, plant and equipment; and other
miscellaneous assets. Assets included in the Corporate and Unallocated column
principally are cash and cash equivalents; other securities; insurance
receivables; deferred income taxes; certain investments and other assets; net
assets of discontinued operations; and certain unallocated property, plant and
equipment.
<F3>
Certain prior period amounts have been reclassified to conform to the current
year presentation.
</FN>
</TABLE>
<PAGE> 37
<TABLE>
Business Segments (continued)
Revenue by Classes of Similar Products or Services (Unaudited)
<CAPTION>
(Millions) 1997 1996 1995
<S> <C> <C> <C>
Tape products $ 2,080 $ 2,096 $ 2,042
Abrasive products 1,326 1,270 1,220
Automotive and chemical products 1,647 1,460 1,328
Connecting and insulating products 1,739 1,564 1,470
Consumer and office products 2,603 2,460 2,272
Health care products 2,476 2,356 2,221
Safety and personal care products 1,355 1,301 1,220
All other products 1,844 1,729 1,687
Total $15,070 $14,236 $13,460
</TABLE>
Geographic Areas
Information in the table below is presented on the basis the company uses to
manage the business. Export sales and certain income and expense items are
reported in the geographic area where the final sales to customers are made,
rather than where the transactions originate.
<TABLE>
<CAPTION>
Latin
Europe America, Elimina-
and Africa tions
United Middle Asia and and Total
(Millions) States East Pacific Canada Other Company
<S> <S> <C> <C> <C> <C> <C> <C>
Net sales to 1997 $7,242 $3,640 $2,632 $1,530 $ 26 $15,070
customers 1996 6,655 3,620 2,577 1,359 25 14,236
1995 6,207 3,489 2,533 1,201 30 13,460
Transfers 1997 $1,810 $ 207 $ 50 $ 247 $(2,314) $ --
between 1996 1,531 173 34 206 (1,944) --
geographic 1995 1,382 153 43 188 (1,766) --
areas
Operating 1997 $1,290 $ 431 $ 610 $ 360 $ (16) $ 2,675
income 1996 1,125 463 617 304 (18) 2,491
1995 925 456 617 247 (24) 2,221
Identifiable 1997 $8,068 $ 2,654 $ 1,577 $ 939 $ -- $13,238
assets* 1996 7,825 2,917 1,761 861 -- 13,364
1995 7,337 2,782 1,802 854 1,408 14,183
<FN>
<F1>
*Net assets of discontinued operations are reported in the Eliminations and
Other column.
</FN>
</TABLE>
Retirement Plans
3M has various company-sponsored retirement plans covering substantially all
U.S. employees and many employees outside the United States. Pension benefits
are based principally on an employee's years of service and compensation near
retirement. Plan assets are invested in common stocks, fixed-income securities,
real estate and other investments.
<PAGE> 38
Retirement Plans (continued)
The company's funding policy is to deposit with an independent trustee amounts
at least equal to those required by law. A trust fund is maintained to provide
pension benefits to plan participants and their beneficiaries. In addition, a
number of plans are maintained by deposits with insurance companies. The charge
to income relating to these plans was $153 million in 1997, $173 million in 1996
and $152 million in 1995.
Under its U.S. pension plan, 3M has elected to retain the benefit obligations
(and related plan assets) applicable to service provided to 3M by U.S. Imation
employees prior to the date of distribution of Imation common stock to 3M
stockholders. As a result of the distribution, 3M's U.S. pension plan was
revalued as of July 1, 1996, to reflect certain plan changes, the effects of the
restructuring and discontinued operations, and a change in the discount rate to
7.75 percent. The effects of these changes were not material.
<TABLE>
<CAPTION>
Net Pension Cost U.S. Plan International Plans
(Millions) 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Service cost $115 $121 $ 96 $ 67 $ 77 $ 86
Interest cost 354 332 304 96 94 92
Return on plan assets - actual (896) (584) (846) (150) (87) (124)
Net amortization and deferral 514 230 532 53 (10) 39
Discontinued operations -- -- (14) -- -- (13)
Net pension cost $ 87 $ 99 $ 72 $ 66 $ 74 $ 80
</TABLE>
<TABLE>
<CAPTION>
Funded Status of Pension Plans U.S. Plan International Plans
(Millions) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Plan assets at fair value $5,411 $4,642 $1,458 $1,369
Accrued(prepaid) pension cost 33 77 (22) (4)
Amount provided for future benefits $5,444 $4,719 $1,436 $1,365
Actuarial present value
Vested benefit obligation 4,386 3,939 1,046 1,007
Nonvested benefit obligation 499 436 87 110
Accumulated benefit obligation $4,885 $4,375 $1,133 $1,117
Amount provided for future benefits
less accumulated benefit obligation 559 344 303 248
Projected benefit obligation 5,392 4,800 1,435 1,439
Plan assets at fair value less
projected benefit obligation $ 19 $ (158) $ 23 $ (70)
Unrecognized net transition
(asset) obligation (74) (112) 22 23
Other unrecognized items 22 193 (23) 51
(Accrued)prepaid pension cost $ (33) $ ( 77) $ 22 $ 4
</TABLE>
<TABLE>
<CAPTION>
U.S. Plan International Plans
Assumptions at Year-End 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.00% 7.50% 7.00% 6.47% 7.10% 7.10%
Compensation rate increase 4.85% 4.85% 5.00% 4.35% 5.60% 5.38%
Long-term rate of return on assets 9.00% 9.00% 9.00% 7.03% 7.68% 7.59%
<FN>
<F1>
Net pension cost is determined using assumptions at the beginning of the year
(adjusted July 1, 1996, for 1996 net pension cost). Funded status is determined
using assumptions at year-end.
</FN>
</TABLE>
<PAGE> 39
Other Postretirement Benefits
The company provides health care and life insurance benefits for substantially
all of its U.S. employees who reach retirement age while employed by the
company. The company has set aside funds with an independent trustee for these
postretirement benefits and makes periodic contributions to the plan. The
trustee invests in common stocks and fixed-income securities. Employees outside
the United States are covered principally by government-sponsored plans. The
cost of company provided plans for these employees is not material.
3M has agreed to provide other postretirement benefits to certain U.S. Imation
employees based on defined eligibility criteria. As a result of the
distribution of Imation common stock to 3M stockholders, 3M's U.S.
postretirement plans were revalued as of July 1, 1996, to reflect certain plan
changes, the effects of the restructuring and discontinued operations, and a
change in the discount rate to 7.75 percent. The effects of these changes were
not material.
The table below shows the components of the net periodic postretirement benefit
cost and a reconciliation of the funded status of the postretirement benefit
plan for U.S. employees.
<TABLE>
Net Periodic Postretirement Benefit Cost
<CAPTION>
(Millions) 1997 1996 1995
<S> <C> <C> <C>
Service cost $ 36 $ 29 $ 26
Interest cost 65 66 63
Return on plan assets - actual (38) (50) (76)
Net amortization and deferral -- 16 51
Discontinued operations -- -- (11)
Total $ 63 $ 61 $ 53
</TABLE>
<TABLE>
Funded Status of Postretirement Benefit Plan
<CAPTION>
(Millions) 1997 1996
<S> <C> <C>
Fair value of plan assets $ 482 $ 449
Accumulated postretirement benefit obligation
Retirees $ 425 $ 305
Fully eligible active plan participants 182 333
Other active plan participants 388 305
Benefit obligation $ 995 $ 943
Plan assets less benefit obligation $(513) $(494)
Adjustments and unrecognized items 36 29
Accrued postretirement cost $(477) $(465)
</TABLE>
The company determines the accumulated postretirement benefit obligation and
related benefit costs by applying relevant actuarial assumptions. The company
expects its health care cost trend rate to slow from 6.7 percent in 1998 to 5.0
percent in 2004, after which the rate is expected to stabilize. The effect of a
one percentage point increase in the assumed health care cost trend rate for
each future year would increase the benefit obligation by $91 million and the
current year benefit expense by $12 million. Other actuarial assumptions at
December 31, 1997, include an expected long-term rate of return on plan assets
of 9.0 percent (before taxes applicable to a portion of the return on plan
assets), and a discount rate of 7.0 percent.
<PAGE> 40
Employee Savings and Stock Ownership Plans
The company sponsors employee savings plans under Section 401(k) of the Internal
Revenue Code. These plans are offered to substantially all regular U.S.
employees. Employee contributions of up to 6 percent of compensation are
matched at rates ranging from 10 to 35 percent, with additional contributions
depending upon company performance.
The company maintains an Employee Stock Ownership Plan (ESOP). This plan was
established in 1989 as a cost effective way of funding the company's
contributions under 401(k) employee savings plans. The ESOP borrowed $548
million to purchase 15.4 million shares of the company's common stock,
previously held in treasury. Because the company has guaranteed repayment of
the ESOP debt, the debt and related unearned compensation are recorded in the
Consolidated Balance Sheet. Total ESOP shares are considered to be shares
outstanding for earnings per share calculations.
Dividends on shares held by the ESOP are paid to the ESOP trust and, together
with company contributions, are used by the ESOP to repay principal and interest
on the outstanding notes. Shares are released for allocation to participants
based on the ratio of the current year's debt service to the sum of total
principal and interest payments over the life of the notes.
Annual expenses related to the ESOP generally represent total debt service on
the notes, less dividends. These amounts are reported as an employee benefit
expense. Unearned compensation, shown as a reduction of stockholders' equity,
is reduced by the higher of principal payments or the cost of shares allocated.
Selected information related to the ESOP for the years ended December 31, 1997,
1996 and 1995 follows.
<TABLE>
ESOP Information
<CAPTION>
(Millions) 1997 1996 1995
<S> <C> <C> <C>
Dividends on shares held by the ESOP $ 30 $ 28 $ 28
Company contributions to the ESOP 37 37 40
Interest incurred on the ESOP's notes 32 34 37
Annual expenses related to the ESOP 36 36 30
</TABLE>
In July 1996, the ESOP received Imation shares from the spin-off distribution.
These shares were sold and the proceeds were used to purchase additional 3M
shares.
<TABLE>
<CAPTION>
ESOP Shares 1997 1996 1995
<S> <C> <C> <C>
Allocated 6,006,099 5,202,188 5,116,265
Committed to be released 184,181 399,220 --
Unreleased 8,286,949 9,103,730 9,892,575
Total 14,477,229 14,705,138 15,008,840
</TABLE>
<PAGE> 41
General Employees' Stock Purchase Plan
Substantially all employees are eligible to participate in the company's General
Employees' Stock Purchase Plan (GESPP). Participants are granted options at 85
percent of market value at the date of grant. Effective July 1997, all options
are exercised on the last business day of each month of grant. Previously,
options were exercised within 27 months from the date of grant.
<TABLE>
<CAPTION>
1997 1996 1995
Exercise Exercise Exercise
Shares Price* Shares Price* Shares Price*
<S> <C> <C> <C> <C> <C> <C>
Under option-
January 1 292,495 $62.35 350,805 $50.21 369,200 $44.21
Granted 1,123,358 77.50 1,498,538 58.78 1,778,647 48.72
Exercised (1,293,282) 74.67 (1,501,011) 55.67 (1,741,794) 47.56
Canceled (122,571) 71.21 (55,837) 52.07 (55,248) 45.75
December 31 -- -- 292,495 $62.35 350,805 $50.21
Options exercisable-
December 31 -- -- 84,893 $63.87 112,495 $51.58
Shares available for grant-
December 31 11,792,662 12,793,449 14,236,150
<FN>
<F1>
*Weighted average
</FN>
</TABLE>
Management Stock Ownership Program
In May 1997, shareholders approved an additional 35 million shares for issuance
under the Management Stock Ownership Program (MSOP). Management stock options
are granted at market value at the date of grant. These options generally are
exercisable one year after the date of grant and expire 10 years from the date
of grant. At year-end, there were 10,057 participants in the plan. To preserve
the intrinsic value of management stock options after the Imation spin-off, the
number of outstanding options and related exercise price were adjusted in 1996,
resulting in no economic impact to participants or to the company.
<TABLE>
<CAPTION>
1997 1996 1995
Exercise Exercise Exercise
Shares Price* Shares Price* Shares Price*
<S> <C> <C> <C> <C> <C> <C>
Under option-
January 1 26,487,335 $52.61 23,974,715 $47.93 22,715,941 $44.82
Granted 5,598,761 91.25 5,810,480 65.54 4,300,298 59.21
Imation Corp.
Adjustment -- -- 1,097,520 50.07 -- --
Exercised (5,241,804) 46.99 (4,225,544) 43.11 (3,001,292) 40.56
Canceled (12,440) 91.70 (169,836) 53.17 (40,232) 47.25
December 31 26,831,852 $59.75 26,487,335 $52.61 23,974,715 $47.93
Options exercisable-
December 31 21,673,983 $52.12 20,462,410 $49.54 20,219,581 $45.72
Shares available for grant-
December 31 35,968,913 6,555,234 13,323,715
<FN>
<F1>
*Weighted average
</FN>
</TABLE>
<PAGE> 42
Management Stock Ownership Program (continued)
<TABLE>
Options Outstanding and Exercisable at December 31, 1997
<CAPTION>
Options Outstanding Options Exercisable
Range of Remaining
Exercise Contractual Exercise Exercise
Prices Shares Life (months)* Price* Shares Price*
<S> <C> <C> <C> <C> <C>
$28.30- 47.00 7,088,750 43 $40.54 7,088,750 $40.54
48.00- 62.00 8,994,934 81 54.08 8,994,934 54.08
63.00-103.45 10,748,168 109 77.17 5,590,299 63.67
<FN>
<F1>
*Weighted average
</FN>
</TABLE>
Stock-Based Compensation
No compensation cost has been recognized for the GESPP or the MSOP. Pro forma
amounts based on the options' estimated fair value at the grant dates for awards
under the GESPP and MSOP are presented below.
<TABLE>
Pro Forma Net Income and Earnings Per Share
<CAPTION>
(Millions) 1997 1996 1995
<S> <C> <C> <C>
Net income
As reported $2,121 $1,526 $ 976
Pro forma 2,032 1,439 911
Earnings per share - basic
As reported $ 5.14 $ 3.65 $2.32
Pro forma 4.92 3.44 2.17
Earnings per share - diluted
As reported $ 5.06 $ 3.62 $2.31
Pro forma 4.85 3.41 2.16
</TABLE>
The weighted average fair value per option granted during 1997, 1996 and 1995
was $13.67, $10.37 and $8.60, respectively, for the GESPP, and $21.81, $13.43
and $12.48, respectively, for the incentive MSOP grants. The weighted average
fair value was calculated by using the fair value of each option grant on the
date of grant. The fair value of GESPP options was based on the 15 percent
purchase discount, and for MSOP options was calculated utilizing the Black-
Scholes option-pricing model and the assumptions that follow.
<TABLE>
<CAPTION>
MSOP Assumptions 1997 1996 1995
<S> <C> <C> <C>
Risk-free interest rate 6.6% 6.4% 5.9%
Dividend growth rate 5.8% 4.3% 5.2%
Volatility 15.0% 14.2% 14.4%
Expected life (months) 67 66 66
</TABLE>
The GESPP and MSOP stock options, if exercised, would have the following
dilutive effect on shares outstanding for 1997, 1996 and 1995, respectively: 6.0
million, 3.9 million and 2.7 million shares. Effective July 1997, all GESPP
options are exercised on the last business day of each month of grant, resulting
in no dilutive effect.
Legal Proceedings
Discussion of legal matters is incorporated by reference from Part I, Item 3, of
this Form 10-K, and should be considered an integral part of the Consolidated
Financial Statements and Notes.
<PAGE> 43
<TABLE>
Quarterly Data (Unaudited)
(Millions, except per-share amounts)
<CAPTION>
First Second Third Fourth Year
<S> <C> <C> <C> <C> <C>
Net sales
1997 $ 3,714 $ 3,817 $ 3,826 $ 3,713 $15,070
1996 3,468 3,522 3,623 3,623 14,236
Cost of goods sold
1997 $ 2,089 $ 2,156 $ 2,173 $ 2,162 $ 8,580
1996 1,990 1,986 2,069 2,054 8,099
Income from continuing operations
1997 $ 410 $ 418 $ 927* $ 366 $ 2,121*
1996 362 381 398 375 1,516
Net income
1997 $ 410 $ 418 $ 927* $ 366 $ 2,121*
1996 362 381 398 385** 1,526**
Basic earnings per share - continuing operations
1997 $ .99 $ 1.01 $ 2.25* $ .90 $ 5.14*
1996 .87 .91 .95 .90 3.63
Basic earnings per share - net income
1997 $ .99 $ 1.01 $ 2.25* $ .90 $ 5.14*
1996 .87 .91 .95 .92** 3.65**
Diluted earnings per share - continuing operations
1997 $ .97 $ .99 $ 2.21* $ .89 $ 5.06*
1996 .86 .90 .94 .89 3.59
Diluted earnings per share - net income
1997 $ .97 $ .99 $ 2.21* $ .89 $ 5.06*
1996 .86 .90 .94 .91** 3.62**
Stock price comparisons (NYSE composite transactions)
1997 High $ 93.25 $105.50 $104.50 $101.19 $105.50
1997 Low 80.00 80.13 86.00 81.38 80.00
1996 High 69.88*** 70.75*** 71.75 85.88 85.88
1996 Low 62.00*** 63.50*** 61.25 68.63 61.25
<FN>
<F1>
* Includes a gain on the sale of National Advertising Company of $495 million
after-tax, or $1.20 per basic share and $1.18 per diluted share.
<F2>
** Includes discontinued operations income of $10 million, or 2 cents per share.
<F3>
***Not adjusted for the distribution of the common stock of Imation Corp.
</FN>
</TABLE>
<PAGE> 44
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
The information required by Items 10 through 13 are incorporated by reference
from the registrant's definitive proxy statement pursuant to general instruction
G(3). The registrant will file with the Commission a definitive proxy statement
pursuant to Regulation 14A by April 30, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The financial statements filed as part of this report are listed in the
index to financial statements on page 45.
All financial statement schedules are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the financial statements or the notes thereto.
(b) Reports on Form 8-K:
The company filed a report on Form 8-K dated February 18, 1998.
Item 5. Other Events. 3M's long-term debt was rated Aaa and AAA by Moody's
Investors Service, Inc. ("Moody's") and Standard and Poor's Corporation ("S&P"),
respectively. On February 4, 1998, Moody's lowered its assigned rating to Aa1,
and on February 10, 1998, S&P lowered its assigned rating to AA. Publications of
Moody's indicate that it assigns the Aa rating to debt securities that are
judged to be of high quality by all standards and are considered high grade
bonds. Publications of S&P indicate that an obligor rated AA has very strong
capacity to meet its financial commitments. The downgrade in ratings is based
on the outlook for continued growth in leverage at 3M resulting from
management's decision to alter 3M's capital structure through increased share
repurchases and debt issuances.
<PAGE> 45
(c) Exhibits:
Incorporated by Reference:
Incorporated by Reference
in the Report From
(3) Restated certificate of incorporation Exhibit (3) to
and bylaws, amended to and Form 10-Q
including amendments of for period ended
May 12, 1987. June 30, 1987.
Restated certificate of incorporation, Form 8-K dated
as amended as of May 13, 1997. June 30, 1997.
Bylaws, as amended as of November 11, 1996. Form 8-K dated
November 20, 1996.
(4) Instruments defining the rights of security
holders, including debentures:
(a) common stock. Exhibit (3) above.
(b) medium-term notes. Registration No. 33-48089
on Form S-3.
(10) Material contracts, management
remuneration:
(a) management stock ownership program. Exhibit 4 of
Registration No. 333-30689
on Form S-8.
(b) profit sharing plan, performance Written description
unit plan and other compensation contained in issuer's
arrangements. proxy statment for the
1998 annual shareholders'
meeting.
Reference (pages)
Form 10-K
Submitted herewith:
(12) Calculation of ratio of earnings
to fixed charges. 47
(21) Subsidiaries of the registrant. 48
(23) Consent of experts. 49
(24) Power of attorney. 50
(27) Financial data schedule for the year ended
December 31, 1997 (EDGAR filing only).
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 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
By /s/ Giulio Agostini
Giulio Agostini, Senior Vice President
Principal Financial and Accounting Officer
March 10, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 10, 1998.
Signature Title
Livio D. DeSimone Chairman of the Board and
Chief Executive Officer, Director
Ronald O. Baukol Director
Edward A. Brennan Director
Edward R. McCracken Director
W. George Meredith Director
Ronald A. Mitsch Director
Allen E. Murray Director
Aulana L. Peters Director
Rozanne L. Ridgway Director
Frank Shrontz Director
F. Alan Smith Director
Louis W. Sullivan Director
Roger P. Smith, by signing his name hereto, does hereby sign this document
pursuant to powers of attorney duly executed by the other persons named, filed
with the Securities and Exchange Commission on behalf of such other persons, all
in the capacities and on the date stated, such persons constituting a majority
of the directors of the company.
By /s/ Roger P. Smith
Roger P. Smith, Attorney-in-Fact
<PAGE> 47
<TABLE>
EXHIBIT 12
MINNESOTA MINING AND MANUFACTURING COMPANY
AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
EARNINGS
Income from continuing operations
before income taxes and
minority interest* $3,440 $2,479 $2,168 $2,011 $1,851
Add:
Interest on debt 94 79 102 70 39
Interest component of the ESOP
benefit expense 32 34 37 39 41
Portion of rent under operating
leases representative of
the interest component 41 46 51 46 44
Less:
Equity in undistributed income
of 20-50 percent owned
companies 3 - 1 2 -
TOTAL EARNINGS AVAILABLE
FOR FIXED CHARGES $3,604 $2,638 $2,357 $2,164 $1,975
FIXED CHARGES
Interest on debt 94 79 102 70 39
Interest component of the ESOP
benefit expense 32 34 37 39 41
Portion of rent under operating
leases representative of
the interest component 41 46 51 46 44
TOTAL FIXED CHARGES $ 167 $ 159 $ 190 $ 155 $ 124
RATIO OF EARNINGS
TO FIXED CHARGES 21.58 16.59 12.41 13.96 15.93
<FN>
<F1>
* 1997 includes a pre-tax gain on the sale of National Advertising Company of
$803 million; 1995 includes a pre-tax restructuring charge of $79 million.
These items are discussed in the Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE> 48
<TABLE>
EXHIBIT 21
MINNESOTA MINING AND MANUFACTURING COMPANY
AND CONSOLIDATED SUBSIDIARIES
PARENT AND SUBSIDIARIES
<CAPTION>
Percentage of
Organized Voting Securities
Under Beneficially Owned
Name of Company Laws of by Registrant
<S> <C> <C>
Registrant:
Minnesota Mining and Manufacturing Company Delaware
Consolidated subsidiaries of the registrant:
Dyneon L.L.C. Delaware 54
Eastern Heights Bank Minnesota 99
3M Unitek Corporation California 100
3M Argentina S.A.C.I.F.I.A. Argentina 100
3M Australia Pty. Limited Australia 100
3M Oesterreich GmbH Austria 100
3M Belgium S.A./N.V. Belgium 100
Seaside Insurance Limited Bermuda 100
3M do Brasil Limitada Brazil 100
3M Canada Inc. Canada 100
3M A/S Denmark 100
Suomen 3M Oy Finland 100
3M France, S.A. France 100
3M Deutschland GmbH Germany 100
3M Hong Kong Limited Hong Kong 100
3M Italia Finanziaria S.p.A. Italy 100
Sumitomo 3M Limited Japan 50
3M Health Care Limited Japan 75
3M Korea Limited Korea 100
3M Mexico, S.A. de C.V. Mexico 100
Corporate Services B.V. Netherlands 100
3M Nederland B.V. Netherlands 100
3M (New Zealand) Limited New Zealand 100
3M Norge A/S Norway 100
3M Puerto Rico, Inc. Puerto Rico 100
3M Singapore Private Limited Singapore 100
3M South Africa (Proprietary) Limited South Africa 100
3M Espana, S.A. Spain 100
3M Svenska AB Sweden 100
3M (East) A.G. Switzerland 100
3M (Schweiz) A.G. Switzerland 100
3M Taiwan Limited Taiwan 100
3M Thailand Limited Thailand 100
3M United Kingdom Holdings P.L.C. United Kingdom 100
3M Venezuela, S.A. Venezuela 100
<FN>
<F1>
NOTE: Subsidiary companies excluded from the above listing, if considered in
the aggregate, would not constitute a significant subsidiary.
</FN>
</TABLE>
<PAGE> 49
EXHIBIT 23
CONSENT TO INCORPORATION BY REFERENCE
We consent to the incorporation by reference in the Registration Statements of
Minnesota Mining and Manufacturing Company 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), of our report dated February 9, 1998, except for
the last paragraph under Debt in the Notes to Consolidated Financial Statements,
as to which the date is February 18, 1998, on our audits of the consolidated
financial statements of Minnesota Mining and Manufacturing Company and
Subsidiaries as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, which report is included in this Annual
Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
St. Paul, Minnesota
March 10, 1998
<PAGE> 50
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That the undersigned directors and the Principal
Financial and Accounting Officer of MINNESOTA MINING AND MANUFACTURING COMPANY,
a Delaware corporation, hereby constitute and appoint Livio D. DeSimone, Giulio
Agostini, John J. Ursu, Roger P. Smith, Janet L. Yeomans and Gregg M. Larson or
any of them, their true and lawful attorneys-in-fact and agents, and each of
them with full power to act without the others, for them and in their name,
place, and stead, in any and all capacities, to do any and all acts and things
and execute any and all instruments which said attorneys and agents may deem
necessary or desirable to enable MINNESOTA MINING AND MANUFACTURING COMPANY to
comply with the Securities Exchange Act of 1934, as amended, and any rules,
regulations, and requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing with said Commission of its
annual report on Form 10-K for the fiscal year ended December 31, 1997,
including specifically, but without limiting the generality of the foregoing,
power and authority to sign the name of MINNESOTA MINING AND MANUFACTURING
COMPANY, and the names of the undersigned directors and Principal Financial and
Accounting Officer to the Form 10-K and to any instruments and documents filed
as part of or in connection with said Form 10-K or amendments thereto; and the
undersigned hereby ratify and confirm all that said attorneys and agents shall
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have subscribed these presents this 9th day
of February, 1998.
/s/ Livio D. DeSimone /s/ Giulio Agostini
Livio D. DeSimone Giulio Agostini
Chairman of the Board and Senior Vice President
Chief Executive Officer, Principal Financial Officer
Director Principal Accounting Officer
/s/ Ronald O. Baukol /s/ Allen E. Murray
Ronald O. Baukol, Director Allen E. Murray, Director
/s/ Edward A. Brennan /s/ Aulana L. Peters
Edward A. Brennan, Director Aulana L. Peters, Director
/s/ Edward R. McCracken /s/ Rozanne L. Ridgway
Edward R. McCracken, Director Rozanne L. Ridgway, Director
/s/ W. George Meredith /s/ Frank Shrontz
W. George Meredith, Director Frank Shrontz, Director
/s/ Ronald A. Mitsch /s/ F. Alan Smith
Ronald A. Mitsch, Director F. Alan Smith, Director
/s/ Louis W. Sullivan
Louis W. Sullivan, Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS AND NOTES.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 230
<SECURITIES> 247
<RECEIVABLES> 2,434
<ALLOWANCES> 0
<INVENTORY> 2,399
<CURRENT-ASSETS> 6,168
<PP&E> 12,098
<DEPRECIATION> 7,064
<TOTAL-ASSETS> 13,238
<CURRENT-LIABILITIES> 3,983
<BONDS> 1,015
0
0
<COMMON> 236
<OTHER-SE> 5,690
<TOTAL-LIABILITY-AND-EQUITY> 13,238
<SALES> 15,070
<TOTAL-REVENUES> 15,070
<CGS> 8,580
<TOTAL-COSTS> 8,580
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94
<INCOME-PRETAX> 3,440
<INCOME-TAX> 1,241
<INCOME-CONTINUING> 2,121
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,121
<EPS-PRIMARY> 5.14
<EPS-DILUTED> 5.06
</TABLE>
