<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, 1998
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: (651) 733-1110
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
Common Stock, Par Value $.50 Per Share New York Stock Exchange
Pacific Exchange
Chicago Stock Exchange
Note: The common stock of the registrant is also traded on the Swiss
stock exchange.
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant, based on the closing price of $77.63 per share as reported on
the New York Stock Exchange-Composite Index on January 29, 1999, was $31.2
billion.
Shares of common stock outstanding at January 31, 1999: 402,145,924.
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 1999
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 54 pages.
The exhibit index is set forth on page 49.
<PAGE> 2
MINNESOTA MINING AND MANUFACTURING COMPANY
FORM 10-K
For the Year Ended December 31, 1998
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" or "company" includes Minnesota Mining and Manufacturing
Company and subsidiaries unless the context otherwise indicates.
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, 1998, the company employed 73,564 people.
Business Segments
Financial information and other disclosures relating to 3M's three
business segments and operations in various geographic areas are
provided in the Notes to Consolidated Financial Statements. 3M's three
business segments bring together common or related 3M technologies,
enhancing the development of innovative products and services and
providing for efficient sharing of business resources. These segments
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 segments.
Industrial and Consumer Markets: This segment provides pressure-
sensitive adhesives, specialty tapes, coated and nonwoven abrasives,
consumer and office products, electronic and electrical products, and
telecommunications products.
Industrial products include a wide variety of high-performance and
general-purpose pressure-sensitive tapes, as well as specialty
products. Major products 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; labels and other materials
for identifying and marking durable goods; coated and non-woven
abrasives for grinding, conditioning and finishing surfaces; finishing
compounds; and products for maintaining and repairing vehicles.
<PAGE> 3
Major consumer and office products include Scotch brand tapes; Post-
it brand Note products, such as flags, 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; nonwoven abrasive
materials for floor maintenance and commercial cleaning; floor
mattings; and home improvement products, including surface-preparation
and wood-finishing materials, and filters for furnaces and air
conditioners.
Major electronic and electrical products include packaging and
interconnection devices; insulating materials, including pressure-
sensitive tapes and resins; and related items. These products are used
extensively by manufacturers of electronic and electrical equipment,
as well as in the construction and maintenance segments of 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.
Transportation, Safety and Specialty Material Markets: This segment
provides reflective sheeting, high-performance graphics, respirators,
automotive components, optical films and specialty materials.
Transportation products include reflective sheetings used on highway
signs, vehicle license plates, construction workzone devices, trucks
and other vehicles. Major occupational health and safety products
include maintenance-free and reusable respirators, plus personal
monitoring systems. Other products include spill-control sorbents,
Thinsulate brand and Lite Loft brand Insulations, traffic control
devices, electronic surveillance products, reflective materials for
personal safety, and films that protect against counterfeiting.
Major commercial graphic products include equipment, films, inks and
related products used to produce graphics for vehicles and signs.
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. Safety and
security products include reflective materials that are widely used on
apparel, footwear and accessories, enhancing visibility in low-light
situations. Optical products include brightness enhancement films for
electronic displays and multilayer optical films. Other products
include natural and color-coated mineral granules for asphalt
shingles. On August 15, 1997, the company sold National Advertising
Company, an outdoor and mall advertising subsidiary that was part of
this segment.
Major specialty materials include protective materials 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.
Health Care Markets: Major product categories include skin health,
medical/surgical supplies and devices, infection control,
cardiovascular systems, health care information systems,
pharmaceuticals, drug delivery systems, dental products, and closures
for disposable diapers.
<PAGE> 4
Medical product lines include skin health and infection protection, as
well as microbiology and health information systems. In skin health,
3M is a leading supplier of medical tapes and dressings. In infection
protection, 3M markets a variety of surgical drapes and masks, as well
as sterilization assurance equipment. The segment also provides
microbiology products, which make it faster and easier for food
processors to test for microbiological quality of food. In health
information systems, 3M markets computer software for hospital coding
and data classification. This segment also provides medical supplies
and devices, including orthopedic casting materials, electrodes,
stethoscopes, heart-lung machines and blood gas monitors.
This segment also serves the pharmaceutical and dental markets, as
well as manufacturers of disposable diapers. Among ethical
pharmaceuticals are analgesics, anti-inflammatories and cardiovascular
products. Other products include drug-delivery systems, such as
metered-dose inhalers, transdermal skin patches and related
components. Dental products include tooth-colored fillings, crowns,
impression materials and orthodontic appliances. This segment also
provides tape closures for disposable diapers, and hook-and-loop
fastening systems and other diaper components that help diapers fit
better.
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.
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 240 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
210 sales offices and distribution centers.
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 $1.016 billion, $1.002 billion and $947 million in 1998, 1997
and 1996, respectively.
Corporate research laboratories support research efforts of division
and market laboratories. These corporate laboratories also engage in
research not directly related to existing 3M product lines. Most
major operating divisions have their own laboratories to improve
existing products and develop new products. Research staff groups
provide specialized services in instrumentation, engineering and
process development. 3M also maintains an organization for
technological development not sponsored by other units of the company.
3M is the owner of many domestic and foreign patents derived primarily
from its research activities. 3M's business as a whole is not
materially dependent upon any one patent, license or trade secret, or
upon any group of related patents, licenses or trade secrets.
<PAGE> 5
The company experienced no significant or unusual problems in the
purchase of raw materials during 1998. 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 1994-1998
<S> <C> <C> <C> <C>
Livio D. DeSimone 62 Chairman of the Board 1991
and Chief Executive Officer
J. Marc Adam 60 Vice President, Marketing 1995 Group Vice President, Medical
Products Group, 1991-1995
Giulio Agostini 63 Senior Vice President, 1993
Finance and
Administrative Services
Ronald O. Baukol 61 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 54 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 62 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 52 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 62 Senior Vice President, 1993
Engineering, Quality and
Manufacturing Services
W. George Meredith 55 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 57 Executive Vice President, 1998 Group Vice President, Traffic and
Transportation, Safety and Personal Safety Markets Group, 1997
Specialty Material 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 59 Senior Vice President, 1997 Vice President, Legal Affairs and
Legal Affairs and General Counsel, 1993-1996
General Counsel
Harold J. Wiens 52 Executive Vice President, 1998 Group Vice President, Industrial
Industrial and Consumer Markets Group, 1998
Markets Executive Vice President, Sumitomo
3M Limited, 1995-1997
Division Vice President, Data Storage
Tape Technology Division, 1994-1995
General Manager, Data Storage Tape
Technology Division, 1992-1994
</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 68 manufacturing
facilities in 24 states. Internationally, 3M has 210 sales offices and
distribution centers. The company operates 86 manufacturing and
converting facilities in 41 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 its possible 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: The preceding sentence
applies to all legal proceedings involving the company except the
breast implant litigation, which is discussed separately in the next
section).
Breast Implant Litigation
As of December 31, 1998, the company had been named as a defendant,
often with multiple co-defendants, in 5,863 lawsuits and 121 claims in
various courts, all seeking damages for personal injuries from
allegedly defective breast implants. These claims and lawsuits
purport to represent 21,001 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, but the company has confirmed that 1,117 of these
claimants have 3M implants. 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.
<PAGE> 8
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 an
emergency appeal from the decertification has been denied by the
Louisiana Supreme Court. A normal appeal remains pending.
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.
<PAGE> 9
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 includes 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 claimants with only Post 8/84 McGhan implants (or only
Post 8/84 McGhan implants plus certain other manufacturers' implants),
the benefits are more limited than for claimants with 3M implants.
Post 8/84 McGhan implant benefits are payable in fixed shares by the
company, Union Carbide Corporation and McGhan Medical Corporation.
McGhan Medical Corporation has defaulted on its fixed share obligation
(which does not affect 3M's obligation to pay its share) and has a
request for a mandatory class action recently approved by the Court.
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, are not affected
by the number of class members who have elected to opt out of the
Revised Settlement Program or the number of class members making
claims under the Revised Settlement Program. In addition to certain
miscellaneous benefits, the Revised Settlement Program provides for
two compensation options for current claimants with 3M implants.
Under the first option, denominated as Fixed Amount Benefits, current
claimants with 3M implants who satisfy disease criteria established in
the prior Settlement Agreement will receive amounts ranging from
$5,000 to $100,000, depending on disease severity or disability level;
whether the claimant can establish that her implants have ruptured;
and whether the claimant also has had implants manufactured by Dow
Corning. Under the second option, denominated as Long-Term Benefits,
current claimants with 3M implants who satisfy more restrictive
disease and severity criteria specified under the Revised Settlement
Program can receive benefits ranging from $37,500 to $250,000.
In addition, current claimants with 3M implants are eligible for (a) a
one-time payment of $3,000 upon removal of 3M implants during the
course of the class settlement, and (b) an advance payment of $5,000
against the above referenced benefits upon proof of having 3M implants
and upon waiving or not timely exercising the right to opt out of the
Revised Settlement Program. Current claimants with only Post 8/84
McGhan implants (or only Post 8/84 McGhan implants plus certain other
manufacturers' implants) are eligible only for benefits ranging from
$10,000 to $50,000.
Eligible participants with 3M implants who did not file current claims
but are able to satisfy the more restrictive disease and severity
criteria during an ongoing period of 15 years will be eligible for the
Long-Term Benefits, subject to certain funding limitations. Such
participants also will be eligible for an advance payment of $1,000
upon proof of having 3M implants and upon waiving or not timely
exercising the right to opt out of the Revised Settlement Program or,
as an elective option expiring on June 15, 1999, a payment of $3,500
in full settlement of all breast implant claims including any claim
for Long-Term Benefits under the Revised Settlement Program. Benefit
levels for eligible participants who are not current claimants and
<PAGE> 10
have only Post 8/84 McGhan implants (or only Post 8/84 McGhan implants
plus certain other manufacturers' implants) will range from $10,000 to
$50,000.
On June 10, 1998 the Court approved the terms of a settlement program
offered by Baxter International, Bristol Meyers-Squibb and the company
to eligible foreign implant recipients (the "Foreign Settlement
Program"). Notices and claim forms were mailed on June 15, 1998.
Benefits to eligible foreign claimants range from $3,500 to $50,000.
As of the date of this filing, the company believes that approximately
90% of the registrants, including 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, 1998, the company has paid $232 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 the 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 1998, the company increased its estimate of the
minimum probable liabilities and associated expenses to approximately
$1.1 billion, with an offsetting increase in the probable amount of
insurance recoveries. This amount represents the company's best
estimate of the minimum amount to cover the cost and expense of the
Revised Settlement Program and the cost and expense of resolving
opt-out claims and recovering insurance proceeds. After subtracting
payments of $963 million as of December 31, 1998, for defense and
other costs and settlements with litigants and claimants, the company
had accrued liabilities of $137 million.
The company has substantial primary and excess products liability
occurrence insurance coverage and claims-made products liability
insurance coverage, which it believes provide coverage for
substantially all of its current exposure for breast implant claims
and defense costs. Most insurers have alleged reservations of rights
to deny all or part of the coverage for differing reasons, including
each insurer's obligations in relation to the other insurers (i.e.
allocation) and which claims trigger both the various occurrence and
claims-made insurance policies. Some insurers have resolved and paid,
or committed to, their policy obligations. The company believes the
failure of many insurers to voluntarily perform as promised subjects
them to the company's claims for excess liability and damages for
breach of the insurers' obligation of good faith.
On September 22, 1994, three excess coverage occurrence insurers
initiated in the courts of the State of Minnesota a declaratory
judgment action against the company and numerous insurance carriers
seeking adjudication of certain coverage issues and allocation among
insurers. On December 9, 1994, the company initiated an action against
its occurrence insurers in the Texas State Court in and for Harrison
County, seeking a determination of responsibility among the company's
various occurrence insurers with applicable coverages. The state of
Texas has the most implant claims. This action has since been removed
to the U.S. District Court, Eastern District of Texas, and stayed
pending resolution of the litigation in the Minnesota courts.
<PAGE> 11
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. The most recent phase was completed on January 20, 1999. The
next phase is scheduled to begin on February 16, 1999.
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 were filed and have been ruled upon by the Court.
While the Court clarified certain aspects of these rulings it also
conducted an additional evidentiary hearing on the issue. The court is
expected to rule on this issue by February 16, 1999.
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, 1998, the company had accrued receivables for
insurance recoveries of $767 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 discussed above) and Texas;
(iii) potential arbitration with claims-made insurers; (iv) delays in
payment by insurers; and (v) the extent to which insurers may become
insolvent in the future. There can be no absolute assurance that the
company will collect all amounts accrued as being probable of recovery
from its insurers.
The company's current estimate of the probable liabilities, associated
expenses and probable insurance recoveries related to the breast
implant claims is based on the facts and circumstances existing at
this time. New developments may occur that could affect the company's
estimates of probable liabilities (including associated expenses) and
the probable amount of insurance recoveries. These developments
include, but are not limited to,
<PAGE> 12
(i) the ultimate Fixed Amount Benefit
distribution to 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 estimate of probable liabilities
(including associated expenses) and the probable amount of insurance
recoveries. Accordingly, the company is not able to estimate its
possible 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.
On September 3, 1998, the United States Environmental Protection
Agency (EPA) instituted a civil administrative proceeding against the
company by filing a complaint alleging violations of the hazardous
waste regulations at the company's Cordova, Ill. facility under the
Resource Conservation and Recovery Act (RCRA). The complaint sought
penalties of $287,600. In January 1999, the Company and the EPA agreed
to the terms of a Consent Agreement and Consent Order, including the
payment of a penalty in the amount of $143,800.
<PAGE> 13
Item 4. Submission of Matters to a Vote of Security Holders.
None in the quarter ended December 31, 1998.
Part II
Item 5. Market Price of 3M's Common Stock and Related Security Holder
Matters.
At January 31, 1999, there were 138,066 shareholders of record.
3M's stock is listed on the New York, Pacific, Chicago and Swiss stock
exchanges.
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: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Sales............................. $15,021 $15,070 $14,236 $13,460 $12,148
Income from Continuing Operations......... 1,213* 2,121* 1,516 1,306** 1,207
Per Share of Common Stock:
Continuing Operations - Basic............ 3.01* 5.14* 3.63 3.11** 2.85
Continuing Operations - Diluted.......... 2.97* 5.06* 3.59 3.09** 2.84
Cash Dividends Declared and Paid.......$ 2.20 $ 2.12 $ 1.92 $ 1.88 $ 1.76
At December 31:
Total Assets #......................... $14,153 $13,238 $13,364 $14,183 $13,068
Long-Term Debt (excluding portion due
within one year)........................ 1,614 1,015 851 1,203 1,031
<FN>
<F1>
* As discussed in the Notes to Consolidated Financial Statements, 1998
includes a restructuring charge of $493 million ($313 million after
tax, or $.77 per diluted share). 1997 includes a gain on the sale
of National Advertising Company of $803 million ($495 million after
tax, or $1.18 per diluted share).
<F2>
# Periods prior to 1996 include net assets of discontinued operations.
<F3>
** 1995 includes a restructuring charge of $79 million ($52 million
after tax, or $.12 per diluted share).
</FN>
</TABLE>
<PAGE> 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Operating Results
Sales in 1998 totaled $15.021 billion, compared with $15.070 billion
in 1997. This followed increases of 5.9 percent in 1997 and 5.8
percent in 1996. Sales in all three years were reduced by the
stronger U.S. dollar. In 1998, currency translation reduced sales by
more than $500 million, or 3 percent.
In the United States, sales totaled $7.231 billion, similar to 1997.
Adjusting for the 1997 sale of the outdoor advertising business, sales
rose about 2 percent. The company posted good growth in consumer,
office, pharmaceuticals and automotive products businesses, but
softness in electronics, industrial and transportation safety markets
affected overall growth.
Internationally, sales totaled $7.790 billion, also similar to 1997.
Flat sales in 1998 reflected negative currency and a difficult
economic backdrop in Japan and many developing countries.
International volume increased about 4 percent and selling prices were
up about 2 percent. The stronger U.S. dollar reduced international
sales by about 6 percent.
<TABLE>
Components of Sales Change
1998 1997
U.S. Intl. Worldwide U.S. Intl. Worldwide
<S> <C> <C> <C> <C> <C> <C>
Volume 0% 4% 2% 9% 13% 11%
Price 0 2 1 0 (1) 0
Translation - (6) (3) - (9) (5)
Total 0% 0% 0% 9% 3% 6%
</TABLE>
In 1998, 3M recorded a $493 million ($313 million after tax)
restructuring charge. Details of the restructuring charge are
discussed in the Notes to Consolidated Financial Statements.
Cost of goods sold, excluding the inventory portion of the
restructuring charge, was 57.9 percent of sales, up nine-tenths of a
percentage point from 1997. In both 1998 and 1997, gross margins
benefited from 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 25.2 percent of
sales, down from 25.3 percent in 1997 and 25.6 percent in 1996.
Continued tight expense controls had a positive effect on this
spending.
<TABLE>
<CAPTION>
(Percent of sales) 1998 1997 1996
<S> <C> <C> <C>
Cost of goods sold 57.9* 57.0 56.9
Selling, general and administrative expenses 25.2 25.3 25.6
<FN>
<F1>
*Excludes restructuring charge
</FN>
</TABLE>
The operating income discussion that follows excludes the
restructuring charge. Operating income totaled $2.532 billion, down
5.4 percent from 1997. Operating income was 16.9 percent of sales,
down from 17.7 percent in 1997 and 17.5 percent in 1996. During 1998,
economic contractions in many international markets where 3M has a
strong presence, and softness in a few key U.S. markets negatively
affected operating income margins. The company estimates that
currency effects reduced operating income by $237 million in 1998 and
$189 million in 1997.
<PAGE> 15
In the United States, operating income decreased 8 percent and profit
margins were down 1.4 percentage points. In 1997, operating income
increased 15 percent and profit margins improved by nine-tenths of a
percentage point.
Internationally, operating income decreased about 3 percent and profit
margins declined by four-tenths of a percentage point. Currency
effects reduced international profits by 17 percent and profit margins
by 1.8 percentage points. In 1997, operating income rose about 1
percent and profit margins declined by three-tenths of a percentage
point. Currency effects reduced international profits in 1997 by 15
percent.
<TABLE>
<CAPTION>
(Percent of sales) 1998 1997 1996
<S> <C> <C> <C>
Operating income 16.9* 17.7 17.5
<FN>
<F1>
* Excludes restructuring charge
</FN>
</TABLE>
Interest expense was $139 million, compared with $94 million in 1997
and $79 million in 1996. The 1998 increase reflects the company's
strategy to lower its cost of capital by moderately increasing
financial leverage. The 1997 increase was due to several factors,
including slightly higher debt balances and higher interest rate
resets on certain long-term floating-rate issues.
Investment and other income was $42 million, compared with $56 million
in 1997 and $67 million in 1996. Lower cash and securities balances
resulted in less interest income in both 1998 and 1997.
In 1997, the company realized a gain of $803 million ($495 million
after tax) on the sale of National Advertising Company. In 1998, a
$10 million gain was recorded to finalize the accounting for this
sale, which is discussed in the Notes to Consolidated Financial
Statements.
The impact of the 1998 restructuring charge and the 1997 gain on
divestiture on 3M's consolidated statement of income and tax rate
follows.
<TABLE>
Supplemental Consolidated Statement of Income Information
(Millions, except per-share amounts)
<CAPTION>
Years ended December 31, 1998 December 31, 1997
Excluding Excluding
Restruc- Restruc- Gain on Gain on
turing turing Reported Dives- Dives- Reported
Charge Charge Total titure titure Total
<C> <S> <S> <S> <S> <S> <S>
Operating income $2,532 $ (493) $ 2,039 $ 2,675 $ -- $ 2,675
Other income and
expense 87 -- 87 38 (803) (765)
Income before income
taxes, minority
interest and
extraordinary loss $2,445 $ (493) $ 1,952 $ 2,637 $ 803 $ 3,440
Provision for income
taxes 865 (180) 685 933 308 1,241
Effective tax rate 35.4% 36.5% 35.1% 35.4% 38.4% 36.1%
Minority interest 54 -- 54 78 -- 78
Income before
extraordinary loss $1,526 $ (313) $ 1,213 $ 1,626 $ 495 $ 2,121
Per share - diluted $ 3.74 $(0.77) $ 2.97 $ 3.88 $ 1.18 $ 5.06
</TABLE>
<PAGE> 16
3M's effective tax rate was 35.1 percent in 1998, compared with 36.1
percent in 1997 and 35.8 percent in 1996. Excluding the 1998
restructuring charge and the 1997 gain on divestiture, the worldwide
effective income tax rate in both 1998 and 1997 was 35.4 percent. The
1998 restructuring charge was taxed at a rate of 36.5 percent. The
1997 gain on divestiture was taxed entirely in the United States at a
rate of 38.4 percent.
Minority interest was $54 million, compared with $78 million in 1997
and $77 million in 1996. Minority interest primarily relates to 3M's
partial ownership of Sumitomo 3M Limited and Dyneon LLC. These
companies' results are fully consolidated in 3M's financial
statements, and then partially eliminated on the minority interest
line to reflect 3M's net position in these companies. The decrease in
1998 minority interest was driven by lower profits in these companies.
The company refinanced debt relating to its Employee Stock Ownership
Plan in the fourth quarter of 1998, replacing the debt with a new bond
carrying a significantly lower interest rate. This resulted in a $38
million after-tax charge, or $0.09 per diluted share. This is reported
as an extraordinary loss from early extinguishment of debt.
Net income totaled $1.175 billion, or $2.88 per diluted share,
compared with $2.121 billion, or $5.06 per diluted share, in 1997.
Excluding the 1998 restructuring charge, the 1998 extraordinary loss
and the 1997 gain on divestiture, net income totaled $1.526 billion,
or $3.74 per diluted share, compared with $1.626 billion, or $3.88 per
diluted share, in 1997. Per-share income was down 3.6 percent. In
1996, income from continuing operations totaled $1.516 billion, or
$3.59 per diluted share.
In 1998, 1997 and 1996, changes in the value of the U.S. dollar
reduced net income by an estimated $141 million, $112 million and $65
million, or 35 cents per share, 27 cents per share and 15 cents per
share, respectively. These estimates include the effect of
translating profits from local currencies into U.S. dollars; the
impact of currency fluctuations on the value of goods transferred
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 $604 million, a 16 percent decrease from 1997.
Return on invested capital was 15.9 percent, a decrease of 2.1
percentage points from 1997. Both economic profit and return on
invested capital exclude the impact of the restructuring. Economic
profit equals after-tax operating income, less a charge for operating
capital employed in 3M's businesses. Return on invested capital is
after-tax operating income divided by average operating capital.
At December 31, 1998, employment totaled 73,564 people, a decrease of
2,075 from year-end 1997. Sales per employee in local currencies
increased about 3 percent in 1998. During the preceding four years,
3M's productivity increased an average of about 9 percent a year.
Performance by Business Segment
Financial information and other disclosures relating to 3M's three
business segments are provided in this Form 10-K, Item 1, Business
Segments, and in the Notes to Consolidated Financial Statements. The
discussion of segment results excludes the effect of the restructuring
charge as this charge was not allocated to the individual segments.
<PAGE> 17
Industrial and Consumer Markets:
This segment represented about 51 percent of consolidated sales in
1998. Sales totaled $7.714 billion, down 0.8 percent from 1997.
Operating income decreased 6.3 percent to $1.285 billion. Operating
income was 16.7 percent of sales, compared with 17.6 percent in 1997.
Results in 1998 were negatively impacted by the strong U.S. dollar,
the Asian economic crisis, softness in the electronics industry and
slowing in the manufacturing sector of the U.S. economy.
This segment develops, manufactures and markets innovative, high-value
products for industrial, consumer and office customers worldwide. Key
industrial products include tapes, adhesives, abrasives, resins,
electrical connectors, and flexible circuits. Many of the market's
new product developments serve fast-growing industries, including
semiconductors, electronics, personal computers and energy management.
Key consumer and office supply products include tapes, notes, scouring
pads and sponges, energy-saving products and floor matting.
Transportation, Safety and Specialty Material Markets:
This segment represented nearly 28 percent of consolidated sales in
1998. Sales totaled $4.125 billion, down 1.8 percent from 1997.
Operating income decreased 6.9 percent to $753 million. Operating
income was 18.2 percent of sales, compared with 19.2 percent in 1997.
Sales and operating income in 1998 were affected by the stronger U.S.
dollar, the Asian economic crisis, delays in the passage of new
federal legislation for highway funding and softness in the
electronics industry.
This market produces reflective materials for traffic safety,
respirators for worker protection, equipment and materials for large-
format graphics, and specialty materials. On August 15, 1997, the
company sold National Advertising Company, an outdoor and mall
advertising subsidiary that was part of this market. National
Advertising Company had annual sales of about $200 million and
operating income of about $35 million. The gain on this sale was not
reflected in the segment's operating income results.
Health Care Markets:
This segment represented nearly 21 percent of consolidated sales in
1998. Sales totaled $3.076 billion, up 2.4 percent from 1997.
Operating income increased 9.1 percent to $600 million. Operating
income was 19.5 percent of sales, up from 18.3 percent in 1997,
despite negative currency effects.
This market's major product categories include skin health,
medical/surgical supplies and devices, infection control,
cardiovascular systems, health care information systems,
pharmaceuticals, drug-delivery systems, dental products, and closures
for disposable diapers.
Performance by Geographic Area
Financial information relating to 3M operations in various geographic
areas is provided in the Notes to Consolidated Financial Statements.
The discussion by geographic area excludes the effect of the
restructuring charge as this charge was not allocated to individual
geographic area.
United States (48% of consolidated sales)
In the United States, adjusted for the 1997 sale of the outdoor
advertising business, sales were up about 2 percent. Operating income
was 16.4 percent of sales, down from 17.8 percent in 1997. The company
posted good growth in consumer, office, pharmaceuticals and automotive
products businesses, but softness in electronics, industrial and
transportation safety markets affected overall sales and profits.
<PAGE> 18
Europe and Middle East (26% of consolidated sales)
Sales in Europe and the Middle East totaled $3.85 billion, up 6
percent from 1997. Local currency sales increased about 8 percent,
while currency translation reduced sales by about 2 percent.
Operating income was 13.4 percent of sales, up from 11.8 percent in
1997. This margin improvement was driven by good local-currency
sales, together with streamlining of operations.
In Western Europe, 3M's unit volume grew about 6 percent, led by
Pacing Plus programs and a market-focused approach to customers. In
Eastern Europe, where the company has traditionally posted very strong
double-digit volume gains, unit sales rose about 11 percent, affected
by the contagion from the turmoil in Russia.
Asia Pacific (16% of consolidated sales)
Unit sales in the Asia Pacific area decreased about 1 percent in 1998.
Selling prices increased more than 2 percent, while currency
translation reduced sales by about 11 percent. Operating income was
21.2 percent of sales, down from 23.2 percent in 1997.
Recession in Japan, economic turmoil in many Asian nations and
depreciating currencies throughout the area affected 3M's Asia Pacific
sales and profits. In Japan, home of 3M's largest international
company, volume increased about 2 percent. Unit sales in Asia,
excluding Japan, declined about 6 percent in 1998.
Latin America, Canada and Africa (10% of consolidated sales)
In Latin America, unit sales increased 6 percent. Slowing economies
throughout this region restrained 3M growth. In Canada, unit sales
increased about 9 percent. In Africa, volume decreased about 1
percent. Operating results in Africa were impacted by soft economies
and weak currencies. Operating income for Latin America, Canada and
Africa was 22.7 percent of sales, down from 23.5 percent in 1997.
Financial Position
3M's financial condition remained strong in 1998, and working capital
remained well-controlled. The company's key inventory index was 3.4
months, down about 10 percent from year-end 1997. The year-end
accounts receivable index was 61 days, up one day from year-end 1997.
The current ratio was 1.4, down from 1.5 at year-end 1997.
Total debt was $3.106 billion, up from $2.514 billion at year-end
1997. Total debt was 34 percent of total capital, compared with 30
percent in 1997, reflecting the planned moderate increase in leverage
during 1998. Of debt outstanding at the end of 1998, $385 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: The preceding sentence applies to all legal proceedings
involving the company except the
<PAGE> 19
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 options to hedge
against the effect of exchange rate fluctuations on cash flows
denominated in foreign currencies.
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 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, 1998, 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 1998, cash flows provided by operating activities of continuing
operations totaled $2.374 billion, up from $1.818 billion in 1997. 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 in 1998 were affected by net
outflows of $255 million relating to implant litigation, compared with
net inflows of $35 million in 1997. In both 1998 and 1997, cash flows
benefited from effective asset management.
Capital spending totaled $1.430 billion, an increase of about 2
percent from 1997. This followed increases of 27 percent in 1997 and
2 percent in 1996. These investments are helping to meet global demand
for new products and to increase manufacturing efficiency.
<PAGE 20>
Cash used for acquisitions and investments totaled $265 million, $40
million and $263 million in 1998, 1997 and 1996, respectively. The
higher amount in 1998 primarily was due to acquisitions in the
occupational health and telecommunication areas. The higher amount in
1996 was primarily due to acquisitions in the health care field, and
the purchase of the minority interest in 3M Korea.
In 1997, 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 $98 million, $51 million and $62 million in 1998, 1997 and
1996, respectively.
Stockholder dividends increased 3.8 percent to $2.20 a share. Cash
dividend payments totaled $887 million. 3M has paid dividends since
1916. In February 1999, the Board of Directors increased the
quarterly dividend on 3M common stock to 56 cents a share, equivalent
to an annual dividend of $2.24 a share. This marks the 41st
consecutive year of dividend increases.
Repurchases of 3M common stock totaled $618 million in 1998, compared
with $1.693 billion in 1997 and $532 million in 1996. The combination
of a reduction in average shares outstanding and higher interest
expense resulted in a net benefit to earnings of $.03 per diluted
share in 1998. In 1997, 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 February 1999, the Board of Directors authorized the repurchase of
up to 12 million of the company's shares. This share repurchase
authorization extends through December 31, 1999. Under a preceding
authorization, the company purchased about 9.8 million shares.
The company's strong credit rating provides ready and ample access to
funds in global capital markets. At year-end 1998, the company had
available short-term lines of credit totaling about $670 million.
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
The company encountered a difficult set of challenges in 1998 - large
negative currency effects, economic contractions in many international
markets, and softness in a few key U.S. markets. To improve
productivity and reduce costs, the company is exiting certain product
lines, consolidating manufacturing operations, and eliminating lower-
value activities in corporate service functions. Relating to these
actions, the company recorded a restructuring charge in 1998. This
charge is discussed in the Notes to Consolidated Financial Statements.
In addition, the company is divesting certain businesses, primarily in
its Health Care segment, as part of its restructuring plan. These
businesses have annual revenues of about $200 million and marginal
operating income. Potential gains from divesting these businesses
with a decreasing strategic fit are not expected to be material and
will be recognized when realized as part of selling, general and
administrative expenses.
The company experienced a net reduction of about 2,200 positions in
the second half of 1998, with a total net reduction of about 4,500
positions expected by December 31, 1999. Each business segment and
geographic area of the company will be affected by this restructuring
plan. The company expects to eliminate
<PAGE> 21
about 1,500 positions in the United States, 1,500 in Europe, 700 in
the Asia Pacific area, and 800 in the company's Latin America, Africa,
and Canada geographic area.
When fully implemented by the end of 1999, the restructuring plan is
expected to provide annual pre-tax savings of about $250 million. The
company anticipates implementation costs associated with this
restructuring plan to be about $35 million in 1999. These costs, not
included in the restructuring charge, include expenses for relocating
employees, inventory and equipment; unfavorable overhead variances;
and other expenses. If the company does not generate adequate sales
growth, normal increases in salaries and wages and additional
depreciation from capital expenditures will create offsets to the
annual savings.
3M expects sales growth in 1999 of 4 to 5 percent in local currencies.
Sales are expected to grow 3 to 4 percent in the United States.
Internationally, the company is expecting to increase sales in local
currencies 5 to 6 percent. Volume growth is anticipated to be about 5
percent in Europe, 5 percent in the Asia Pacific area and 3 to 4
percent in Japan. In Asia outside Japan, volume growth is expected to
resume in 1999. In Latin America, it is difficult to predict
ramifications of the Brazilian currency devaluation, and therefore the
company is not expecting any contribution to earnings growth from
Latin America.
The company is not able to project what the consequences will be from
the turmoil in various economies around the world. The company is
monitoring business conditions closely and is prepared to make
adjustments in costs, pricing and investments as appropriate. The
company expects to resume earnings growth in 1999, driven by volume
growth, new products, greater productivity gains and tight expense
controls.
Based on exchange rates as of February 10, 1999, the company believes
that currency effects will have a minimal impact on sales and earnings
in 1999.
Capital spending totaled $1.430 billion in 1998, and is expected to be
about 10 percent lower in 1999. The company does not expect a
significant change in its tax rate in 1999.
Year 2000 Readiness
The Year 2000 issue is the result of using only the last two digits to
indicate the year in computer hardware and software programs and
embedded technology such as micro-controllers. As a result, these
programs do not properly recognize a year that begins with "20"
instead of the familiar "19." If uncorrected, such programs will be
unable to interpret dates beyond the year 1999, which could cause
computer system failure or other errors disrupting normal business
operations.
The company recognizes the importance of readiness for the Year 2000
and has given it high priority. In November 1996, the company created
a corporate-wide Year 2000 project team representing all company
business and staff units. The team's objective is to ensure an
uninterrupted transition to the year 2000 by assessing, testing and
modifying IT and non-IT systems (defined below) and date-sensitive
company products so that (a) they will perform as intended, regardless
of the date (before, during and after December 31, 1999), and (b)
dates (before, during and after December 31, 1999 and including
February 29, 2000) can be processed with expected results ("Year 2000
Compliant"). The scope of the Year 2000 compliance effort includes (i)
information technology ("IT") such as software and hardware; (ii) non-
IT systems or embedded technology such as micro-controllers contained
in various manufacturing and laboratory equipment; environmental and
safety systems, facilities and
<PAGE> 22
utilities, (iii) date-sensitive company products; and (iv) the
readiness of key third parties, including suppliers and customers,
and the electronic data interchange (EDI) with those key third parties.
The Year 2000 project team has taken an inventory of IT and non-IT
systems and date-sensitive company products that might malfunction or
fail as a result of using only the last two digits to indicate the
year. The project teams then categorized the potential date component
failures into three categories: "Vital" (stops the business operation
and no short-term solution is available); "Critical" (inconvenient to
the business operation and a short-term solution is available); and
"Marginal" (inconsequential to the business operation).
IT Systems - The company is using both internal and external resources
to remediate and test millions of lines of application software code.
As of December 31, 1998, approximately 95 percent of the core IT
systems (e.g., general ledger, payroll, procurement and order
management) located in the United States that are deemed "Vital" or
"Critical" are Year 2000 Compliant. As of December 31, 1998,
approximately 95 percent of the IT systems in subsidiaries outside the
United States that are deemed "Vital" or "Critical" are Year 2000
Compliant.
Non-IT Systems - The company has more than 100 manufacturing and
laboratory locations worldwide with varying degrees of non-IT systems
(such as programmable logic controllers, gauging guidance and
adjustment systems and testing equipment). Assessment and testing of
non-IT systems for Year 2000 compliance has proven much more difficult
than assessing compliance of IT systems because testing of non-IT
systems often requires shutdown of the manufacturing operations.
As a result, the company has approached assessment and testing of non-
IT systems that are common to many of the company's facilities by (i)
contacting the suppliers of these non-IT systems and obtaining
statements that the systems are Year 2000 Compliant, and (ii) testing
components of non-IT systems when they are shut down for normal
maintenance. The company has also shut down manufacturing lines in
three of its facilities and tested non- IT systems that are common to
many of the company's facilities. These tests demonstrate that "time
intervals" instead of "dates" are used almost exclusively in these
non-IT systems and support the company's belief that potential
disruptions of such systems due to the Year 2000 issue should be
minimal.
As of December 31, 1998, approximately 85 percent of the non-IT
systems located in the United States that are deemed "Vital" or
"Critical" and approximately 90 percent of the non-IT systems in
subsidiaries outside the United States that are deemed "Vital" or
"Critical" are believed to be Year 2000 Compliant.
Company Products - The vast majority of the company's products are not
date-sensitive. The company has collected information on current and
discontinued date-sensitive products. This information is available
to customers as of the date of this filing.
Third Parties - In addition to internal Year 2000 IT and non-IT
remediation activities, the company is in contact with key suppliers
and electronic commerce customers to minimize potential disruptions in
the relationships between the company and these important third
parties related to the Year 2000 issue. The company has also
categorized supplies purchased from vendors into three categories:
"Vital" (disruption of supply stops the business operation and no
short-term solution is available); "Critical" (disruption of supply is
inconvenient to the business operation and a short-term solution is
<PAGE> 23
available); and "Marginal" (disruption of supply is inconsequential to
the business operation). The company has focused its efforts on those
vendors that supply goods or services deemed "Vital" to the company's
business. While the company cannot guarantee compliance by third
parties, the company is developing contingency plans with its key
suppliers that includes the availability of appropriate inventories of
supplies in the event the supplier is not Year 2000 Compliant.
Contingency Planning - The company is preparing contingency plans
specifying what the company will do if failures occur in IT and non-IT
systems, or important third parties are not Year 2000 Compliant. The
company expects to finalize contingency plans by March 31, 1999, for
its IT and non-IT systems, and by April 30, 1999, for its key
suppliers.
Costs - Through December 31, 1998, the company had spent $53 million
out of a total estimate of approximately $86 million related to Year
2000 readiness issue. These costs include the costs incurred for
external consultants and professional advisors and the costs for
software and hardware. The company's process for tracking internal
costs does not capture all of the costs incurred for each of the teams
working on the Year 2000 project. Such internal costs are principally
the related payroll costs for its information systems group and other
employees working on the Year 2000 project. 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 current estimates of the 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 made using
assumptions of future events including the continued availability of
certain resources, such as skilled IT personnel and electrical power,
Year 2000 modification plans, implementation success by key third-
parties, and other factors. New developments could affect the
company's estimates of the amount of time and costs needed to modify
and test its IT and non-IT 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 date-sensitive code in both IT and non-IT
systems; (iii) unanticipated failures in IT and non-IT systems; and
(iv) the planning and Year 2000 compliance success that key customers
and suppliers attain.
The company cannot determine the impact of these potential
developments on the current estimate of probable costs of making its
products and IT and non-IT systems Year 2000 Compliant. Accordingly,
the company is not able to estimate possible future costs beyond the
current estimates. As new developments occur, these cost estimates
may be revised to reflect the impact of these developments on the
costs to the company of making its products and IT and non-IT systems
Year 2000 Compliant. Such cost revisions 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 could also have a material adverse effect on the
consolidated financial position or annual results of operations of the
company.
The Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European
Union (EU) established fixed conversion rates through the European
Central Bank (ECB) between existing local currencies and the euro, the
EU's new single currency. The participating countries had agreed to
adopt the euro as their common legal currency on that date. From that
date, the euro is traded on currency exchanges and is available for
non-cash transactions.
<PAGE> 24
Following introduction of the euro, local currencies will remain legal
tender until December 31, 2001. During this transition period, goods
and services may be paid for with the euro or the local currency under
the EU's "no compulsion, no prohibition" principle. If cross-border
payments are made in a local currency during this transition period,
the amount will be converted into euros and then converted from euros
into the second local currency at rates fixed by the ECB. By no later
than December 31, 2001, the participating countries will issue new
euro-denominated bills and coins for use in cash transactions. By no
later than July 1, 2002, participating countries will withdraw all
bills and coins denominated in local currencies, making the euro
conversion complete.
In February 1997, the company created a European Monetary Union (EMU)
Steering Committee and project teams representing all company business
and staff units in Europe. The common objective of these teams is to
ensure a smooth transition to EMU for the company and its
constituencies. The scope of the teams' efforts includes (i)
assessing the euro's impact on the company's business and pricing
strategies for customers and suppliers, and (ii) ensuring that the
company's business processes and information technology (IT) systems
can process transactions in euros and local currencies during the
transition period and achieve the conversion of all relevant local
currency data to the euro by December 31, 2001, in the participating
countries.
Europe is a significant market for the company, contributing 26% of
consolidated sales and 20% of consolidated operating income in 1998
(excluding the restructuring charge). The company believes that the
euro will, over time, increase price competition for the company's
products across Europe due to cross-border price transparency. The
company also believes that the adverse effects of increased price
competition will be offset somewhat by new business opportunities and
efficiencies in what is the world's second largest economy. The
company, however, is not able to estimate the anticipated net long-
term impact of the euro introduction on the company.
The company has consolidated IT operations and made significant
investments in IT systems in Europe in anticipation of the EMU. The
company expects that these investments will enable the company to
manage customer orders, invoices, payments and accounts in euros and
in local currencies according to customer needs during the three-year
transition period. During this period, the company anticipates
spending approximately $35-50 million to complete the conversion to
the euro. Because the company believes its IT systems will be ready by
December 31, 2001 for the euro conversion, it has not developed
contingency plans at this time.
The euro introduction is not expected to have a material impact on the
company's overall currency risk. Although the company engages in
significant trade within the EU, the impact to date of changes in
currency exchange rates on trade within the EU has not been material.
The company anticipates the euro will simplify financial issues
related to cross-border trade in the EU and reduce the transaction
costs and administrative time necessary to manage this trade and
related risks. The company believes that the associated savings will
not be material to corporate results.
The company has derivatives outstanding beyond January 1, 1999, in
several European currencies. Under the EU's "no compulsion, no
prohibition" principle, the outstanding derivative positions will
either mature as local currency contracts or convert to euro contracts
at no additional economic cost to the company. The company believes
that systems used to monitor derivative positions can be appropriately
modified for these changes. The company
<PAGE> 25
believes the impact of the euro introduction on the company's
derivative positions will not be material.
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," "will," "should," "could" and other expressions
that indicate future events and trends identify forward-looking
statements.
Actual future results and trends may differ materially from historical
results or those anticipated depending on a variety of factors,
including, but not limited to: foreign exchange rates and fluctuations
in those rates; the effects of, and changes in, worldwide economic
conditions; raw materials, including shortages and increases in the
costs of key raw materials; the 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).
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Reference (pages)
Form 10-K
Data submitted herewith:
Report of Independent Auditors ............................... 26
Consolidated Statement of Income for the years ended
December 31, 1998, 1997 and 1996 ........................... 27
Consolidated Balance Sheet at December 31, 1998 and
1997 ....................................................... 28
Consolidated Statement of Changes in Stockholders'
Equity and Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996............................ 29
Consolidated Statement of Cash Flows
for the years ended December 31,
1998, 1997 and 1996 ........................................ 30
Notes to Consolidated Financial Statements ..................31-47
<PAGE> 26
Report of Independent Auditors
To the Stockholders and Board of Directors of Minnesota Mining and
Manufacturing Company:
In our opinion, the consolidated financial statements as listed in
Item 8 of this Form 10-K present fairly, in all material respects, the
consolidated financial position of Minnesota Mining and Manufacturing
Company and Subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 which require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Paul, Minnesota
February 8, 1999
<PAGE> 27
<TABLE>
Consolidated Statement of Income
Minnesota Mining and Manufacturing Company and Subsidiaries
<CAPTION>
Years ended December 31 1998 1997 1996
(Amounts in millions, except per-share amounts)
<S> <C> <C> <C>
Net sales $15,021 $15,070 $14,236
Operating expenses
Cost of goods sold 8,705 8,580 8,099
Restructuring charge - inventory 39 -- --
Total cost of goods sold 8,744 8,580 8,099
Selling, general and administrative expenses 3,784 3,815 3,646
Restructuring charge - other 454 -- --
Total 12,982 12,395 11,745
Operating income 2,039 2,675 2,491
Other income and expense
Interest expense 139 94 79
Investment and other income - net (42) (56) (67)
Gain on divestiture - net (10) (803) --
Total 87 (765) 12
Income from continuing operations before income taxes,
minority interest and extraordinary loss 1,952 3,440 2,479
Provision for income taxes 685 1,241 886
Minority interest 54 78 77
Income from continuing operations 1,213 2,121 1,516
Discontinued operations
Gain on disposal of discontinued
businesses - net of income taxes -- -- 10
Income before extraordinary loss 1,213 2,121 1,526
Extraordinary loss from early extinguishment
of debt - net of income taxes (38) -- --
Net income $ 1,175 $ 2,121 $ 1,526
Weighted average common shares outstanding 403.3 412.7 418.2
Earnings per share - basic
Income from continuing operations $ 3.01 $ 5.14 $ 3.63
Discontinued operations -- -- .02
Extraordinary loss (.10) -- --
Net income $ 2.91 $ 5.14 $ 3.65
Weighted average common and
common equivalent shares outstanding 408.0 418.7 422.1
Earnings per share - diluted
Income from continuing operations $ 2.97 $ 5.06 $ 3.59
Discontinued operations -- -- .02
Extraordinary loss (.09) -- --
Net income $ 2.88 $ 5.06 $ 3.62
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
</FN>
</TABLE>
<PAGE> 28
<TABLE>
Consolidated Balance Sheet
Minnesota Mining and Manufacturing Company and Subsidiaries
<CAPTION>
At December 31 1998 1997
(Dollars in millions)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 211 $ 230
Other securities 237 247
Accounts receivable - net 2,666 2,434
Inventories 2,219 2,399
Other current assets 985 858
Total current assets 6,318 6,168
Investments 623 613
Property, plant and equipment - net 5,566 5,034
Other assets 1,646 1,423
Total $14,153 $13,238
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 868 $ 898
Payroll 487 306
Income taxes 261 238
Short-term debt 1,492 1,499
Other current liabilities 1,278 1,042
Total current liabilities 4,386 3,983
Other liabilities 2,217 2,314
Long-term debt 1,614 1,015
Stockholders' equity - net 5,936 5,926
Shares outstanding - 1998: 401,924,248
1997: 404,724,947
Total $14,153 $13,238
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
</FN>
</TABLE>
<PAGE> 29
<TABLE>
Consolidated Statement of Changes in
Stockholders' Equity and Comprehensive Income
Minnesota Mining and Manufacturing Company and Subsidiaries
<CAPTION>
Common Accumulated
Stock and Unearned Other
Capital in Compen- Compre-
(Dollars in millions, Excess Retained Treasury sation hensive
except per-share amounts) Total of Par Earnings Stock ESOP Income
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $6,884 $296 $9,164 $(2,053) $(437) $ (86)
Net income 1,526 1,526
Cumulative translation - net (76) (76)
Fair value adjustments (1) (1)
Total comprehensive income 1,449
Dividends paid ($1.92 per share) (803) (803)
Special dividend of Imation Corp.
common stock (1,008) (1,008)
Amortization of unearned compensation 25 25
Reacquired stock (7.6 million shares) (532) (532)
Issuances pursuant to stock option
and benefit plans (5.7 million shares) 269 (123) 392
Balance at December 31, 1996 $6,284 $296 $8,756 $(2,193) $(412) $(163)
Net income 2,121 2,121
Cumulative translation - net (369) (369)
Fair value adjustments (7) (7)
Total comprehensive income 1,745
Dividends paid ($2.12 per share) (876) (876)
Amortization of unearned compensation 33 33
Reacquired stock (18.7 million shares) (1,693) (1,693)
Issuances pursuant to stock option
and benefit plans (6.6 million shares) 433 (153) 586
Balance at December 31, 1997 $5,926 $296 $9,848 $(3,300) $(379) $(539)
Net income 1,175 1,175
Cumulative translation - net 29 29
Fair value adjustments 2 2
Total comprehensive income 1,206
Dividends paid ($2.20 per share) (887) (887)
Amortization of unearned compensation 29 29
Reacquired stock (7.4 million shares) (618) (618)
Issuances pursuant to stock option
and benefit plans (4.6 million shares) 280 (156) 436
Balance at December 31, 1998 $5,936 $296 $9,980 $(3,482) $(350) $(508)
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
</FN>
</TABLE>
<PAGE> 30
<TABLE>
Consolidated Statement of Cash Flows
Minnesota Mining and Manufacturing Company and Subsidiaries
<CAPTION>
Years ended December 31 1998 1997 1996
(Dollars in millions)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $1,175 $2,121 $1,526
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation 798 800 825
Amortization 68 70 58
Asset impairment charges - restructuring 182 -- --
Gain on divestiture - net (6) (495) --
Income tax paid relating to divestiture (4) (308) --
Implant litigation - net (255) 35 (275)
Accounts receivable (160) (149) (170)
Inventories 195 (295) (75)
Other - net 381 39 152
Net cash provided by continuing operations 2,374 1,818 2,041
Net cash (used) provided by discontinued operations -- (112) 170
Net cash provided by operating activities 2,374 1,706 2,211
Cash Flows from Investing Activities
Capital expenditures (1,430) (1,406) (1,109)
Proceeds from sale of property, plant and equipment 25 38 66
Acquisitions and other investments (265) (40) (263)
Proceeds from National Advertising Company divestiture -- 1,000 --
Proceeds from other divestitures and investments 98 51 62
Discontinued operations - net -- -- (17)
Net cash used in investing activities (1,572) (357) (1,261)
Cash Flows from Financing Activities
Change in short-term debt - net 55 705 (76)
Repayment of long-term debt (129) (565) (15)
Proceeds from long-term debt 645 337 173
Purchases of treasury stock (618) (1,693) (532)
Reissuances of treasury stock 292 355 268
Payment of dividends (887) (876) (803)
Other (96) (22) 79
Net cash used in financing activities (738) (1,759) (906)
Effect of exchange rate changes on cash (83) 57 54
Net (decrease) increase in cash and cash equivalents (19) (353) 98
Cash and cash equivalents at beginning of year 230 583 485
Cash and cash equivalents at end of year $ 211 $ 230 $ 583
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
</FN>
</TABLE>
<PAGE> 31
Notes to Consolidated Financial Statements
Accounting Policies
Consolidation: All significant subsidiaries are consolidated. All
intercompany transactions are eliminated.
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 income
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
receivables, goodwill, patents, other intangibles, deferred taxes and
other noncurrent assets. Goodwill is amortized on a straight-line
basis over the periods benefited, typically 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.
Property, plant and equipment: Depreciation of property, plant and
equipment generally is computed using the straight-line method based
on estimated useful lives of the assets. 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 operations.
<PAGE> 32
Advertising and merchandising: These costs are charged to operations
in the year incurred.
Derivatives and hedging activities: 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.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The company must
adopt this standard no later than January 1, 2000. The company is
reviewing the requirements of this standard. Although the company
expects that this standard will not materially affect its financial
position or results of operations, it has not yet determined the
impact of this standard on its financial statements.
Accounting for stock-based compensation: The company uses the
intrinsic value method for the Management Stock Ownership Program.
The General Employees' Stock Purchase Plan is considered
noncompensatory.
Comprehensive income: Effective January 1, 1998, the company adopted
SFAS No. 130, "Reporting Comprehensive Income." Total comprehensive
income and the components of accumulated other comprehensive income
are presented in the Consolidated Statement of Changes in
Stockholders' Equity and Comprehensive Income.
Earnings per share: The difference in the weighted average shares
outstanding for calculating basic and diluted earnings per share is
attributable to the assumed exercise of Management Stock Ownership
Program stock options, if dilutive, and also includes the effect of
the assumed exercise of General Employees' Stock Purchase Plan (GESPP)
options for periods through June 30, 1997. Effective July 1997, GESPP
options no longer have a dilutive effect.
Restructuring Charge
To reduce costs and improve productivity, the company is streamlining
corporate structure, consolidating manufacturing operations and
exiting certain product lines.
In 1998, the company recorded a restructuring charge of $332 million
($214 million after tax) in the third quarter and $161 million ($99
million after tax) in the fourth quarter, for a total of $493 million
($313 million after tax). As discussed below, a portion of this
restructuring charge ($39 million) has been classified as a component
of cost of goods sold. The restructuring charge does not include the
write-down of goodwill or other intangible assets.
<PAGE> 33
Of the total restructuring charge, $271 million relates to employee
termination benefits. The company expects to terminate approximately
4,800 employees by December 31, 1999. These reductions will take place
in each business segment and geographic area of the company and in all
major functions.
Under the plan, the company terminated 1,225 employees in the second
half of 1998, of whom about one-third were in the United States and
two-thirds were abroad. Because certain employees can defer receipt of
termination benefits for up to 12 months, cash payments lag job
eliminations. After subtracting payments of $39 million made through
December 31, 1998, the company had a remaining liability of $232
million related to employee termination benefits at year-end. This has
been classified in current liabilities - payroll on the Consolidated
Balance Sheet and will be funded through cash provided by operating
activities.
The company plans to consolidate or downsize manufacturing operations
including actions in seven locations in the United States, nine in
Europe, four in the Asia Pacific area and two in Latin America. As
part of the restructuring plan, the company is also discontinuing
product lines which had combined annual sales of less than $100
million and marginal operating income in each of the years 1998, 1997
and 1996.
The restructuring charge includes $143 million, net of salvage value,
for the write-down of assets included in property, plant and
equipment. These assets primarily include specialized 3M manufacturing
machinery and equipment. Estimated salvage values are based on
estimates of proceeds upon sale of certain of the affected assets.
The restructuring charge also includes $79 million for losses on
inventory write-downs and exit plans. The company has taken an
inventory write-down of $39 million, which has been classified as a
component of cost of goods sold, for certain product lines that are
being discontinued. The losses on exit plans include $40 million in
incremental costs and contractual obligations for items such as
leasehold termination payments and other facility exit costs incurred
as a direct result of this plan. After subtracting $8 million in
payments made through December 31, 1998, the company had a remaining
balance in other current liabilities of $32 million for these exit
costs at year-end.
Selected information relating to the restructuring charge follows.
<TABLE>
<CAPTION>
Employee Write-down of
Termination Property, Plant
(Millions) Benefits and Equipment Other Total
<S> <C> <C> <C> <C>
1998 restructuring charge
Third quarter $102 $161 $69 $332
Fourth quarter 169 -- 10 179
Fourth quarter change in estimate -- (18) -- (18)
Total restructuring charge $271 $143 $79 $493
Write-down of assets to
net realizable value -- (143) (39) (182)
Cash payments (39) -- (8) (47)
Restructuring liability as of
December 31, 1998 $232 $ -- $32 $264
</TABLE>
<PAGE> 34
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 $1.18 per diluted
share, in 1997. National Advertising Company had annual sales of
about $200 million and operating income of about $35 million. In
1998, a $10 million gain was recorded to finalize the accounting for
this sale.
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 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 reported Imation and the audio and video business as
discontinued operations.
The 1995 loss on disposal of $373 million included the estimated
future results of operations through the estimated date of spin-off or
closure. The $10 million 1996 gain on disposal reflects final
adjustments to the company's 1995 estimated loss on disposal.
<TABLE>
Supplemental Statement of Income Information
<CAPTION>
(Millions) 1998 1997 1996
<S> <C> <C> <C>
Research and development costs $1,016 $1,002 $947
Advertising and merchandising costs 448 471 459
</TABLE>
<TABLE>
Supplemental Balance Sheet Information
<CAPTION>
(Millions) 1998 1997
<S> <C> <C>
Accounts receivable
Accounts receivable $ 2,751 $ 2,523
Less allowances 85 89
Accounts receivable - net $ 2,666 $ 2,434
Inventories
Finished goods $ 1,161 $ 1,293
Work in process 613 605
Raw materials and supplies 445 501
Total inventories $ 2,219 $ 2,399
Other current assets
Product and other insurance receivables $ 291 $ 254
Deferred income taxes 175 134
Other 519 470
Total other current assets $ 985 $ 858
</TABLE>
<PAGE> 35
<TABLE>
Supplemental Balance Sheet Information (continued)
<CAPTION>
(Millions) 1998 1997
<S> <C> <C>
Other securities and investments*
Held-to-maturity (amortized cost) $ 164 $ 181
Available-for-sale (fair value) 214 179
Other (cost, which approximates fair value) 482 500
Total other securities and investments $ 860 $ 860
Property, plant and equipment - at cost
Land $ 283 $ 275
Buildings and leasehold improvements 3,328 2,916
Machinery and equipment 9,102 8,178
Construction in progress 684 729
$13,397 $12,098
Less accumulated depreciation 7,831 7,064
Property, plant and equipment - net $ 5,566 $ 5,034
Other assets
Product and other insurance receivables $ 862 $ 805
Deferred income taxes 88 167
Other 696 451
Total other assets $ 1,646 $ 1,423
Other current liabilities
Product and other claims $ 221 $ 202
Restructuring 32 --
Deposits - banking operations** 149 128
Deferred income taxes 6 9
Other 870 703
Total other current liabilities $ 1,278 $ 1,042
Other liabilities
Product and other claims $ 447 $ 698
Minority interest in subsidiaries 390 361
Nonpension postretirement benefits 497 477
Deposits - banking operations** 260 249
Deferred income taxes 193 89
Other 430 440
Total other liabilities $ 2,217 $ 2,314
<FN>
<F1>
*Unrealized gains and losses relating to other securities and
investments classified as available-for-sale are included as a
component of accumulated other comprehensive income in stockholders'
equity. Realized gains and losses in 1998 and 1997 were not material.
<F2>
**Primarily demand deposits and, as such, the carrying amount
approximates fair value.
</FN>
</TABLE>
<PAGE> 36
Supplemental Stockholders' Equity Information
Common stock ($.50 par value per share; without par value at December
31, 1996) of 1 billion shares is authorized, with 472,016,528 shares
issued in 1998, 1997 and 1996. Common stock and capital in excess of
par includes $60 million transferred from common stock to capital in
excess of par value during 1997. Preferred stock, without par value,
of 10 million shares is authorized but unissued. The following table
shows the ending balances of the components of accumulated other
comprehensive income. The tax effects and reclassification adjustments
were not material.
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
<S> <C> <C> <C>
Accumulated other comprehensive income
Cumulative translation - net $ (518) $ (547) $ (178)
Debt and equity securities, unrealized gain - net 10 8 15
Total accumulated other comprehensive income $ (508) $ (539) $ (163)
</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) 1998 1997 1996
<S> <C> <C> <C>
Income tax payments $467 $1,123 $761
Interest payments 130 91 78
</TABLE>
Income tax payments in 1997 include $308 million related to the gain
on the sale of National Advertising Company.
In 1998, the 3M Employee Stock Ownership Plan (ESOP) refinanced its
existing debt by issuing new debt of $385 million. Because the
company has guaranteed repayment of the ESOP debt, the debt and
related unearned compensation are recorded on the Consolidated Balance
Sheet. The repayment of principal and proceeds of long-term debt
relating to the ESOP have been excluded from the financing activities
of the company in the Consolidated Statement of Cash Flows because the
funds involved were received and disbursed by the ESOP trust.
In connection with the spin-off of Imation, 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
in installment payments over the period 1997 through 1999.
<PAGE> 37
Debt
<TABLE>
<CAPTION>
Short-Term Debt Effective
(Millions) Interest Rate* 1998 1997
<S> <C> <C> <C>
Commercial paper 5.05% $ 978 $1,070
Long-term debt - current portion 5.03% 131 163
Other borrowings 6.09% 383 266
Total short-term debt $1,492 $1,499
</TABLE>
<TABLE>
<CAPTION>
Long-Term Debt Effective Maturity
(Millions) Interest Rate* Date 1998 1997
<S> <C> <C> <C> <C>
ESOP debt guarantee 5.62% 2000-2009 $ 359 $ 338
U.S. dollar 6.375% note 6.38% 2028 330 --
U.S. dollar 6.625% Eurobond 4.67% 2001 250 250
3M Deutschland GmbH 5.75% Eurobond 3.56% 2001 216 --
German mark 5% Euronote 4.90% 2001 165 165
Medium-term 6.25% note -- 1999 -- 100
Sumitomo 3M Limited 0.795% note 0.795% 2003 88 --
Other borrowings 5.57% 2000-2037 206 162
Total long-term debt $1,614 $1,015
<FN>
<F1>
*Reflects the effects of interest rate and currency swaps at December
31, 1998.
</FN>
</TABLE>
Debt with fixed interest rates includes the ESOP, U.S. dollar 6.375
percent note, Sumitomo 3M Limited note, 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. Debt not denominated in U.S. dollars
includes the 5.75 percent Eurobond, the Sumitomo 3M Limited note, and
most of other borrowings. Other borrowings include debt held by 3M's
international companies and floating rate notes and industrial bond
issues in the United States.
Maturities of long-term debt for the next five years are: 1999, $131
million; 2000, $39 million; 2001, $674 million; 2002, $36 million; and
2003, $140 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.
At year-end 1998, the company had available short-term lines of credit
totaling about $670 million.
<PAGE> 38
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 shown 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 company's exposure 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, 1998 and 1997.
<TABLE>
<CAPTION>
Notional Amounts
(Millions) 1998 1997
<S> <C> <C>
Interest rate swaps $350 $514
Currency swaps 265 452
</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 foreign currencies. 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, 1998 and 1997, were not material.
<TABLE>
<CAPTION>
Face Amounts
(Millions) 1998 1997
<S> <C> <C>
Forward contracts $1,050 $966
Options purchased 590 472
Options sold 88 123
</TABLE>
The company engages in hedging activities to reduce exchange rate
risks arising from cross-border cash flows denominated in foreign
currencies. The company operates on a global basis, generating more
than half its revenues internationally and engaging in substantial
product and financial transfers among geographic areas. Major forward
contracts at December 31, 1998, were denominated in British pounds,
Japanese yen, German marks, Singapore dollars and Belgian francs.
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 both 1998
and 1997, and $138 million in 1996. The table below shows minimum
payments under operating leases with noncancelable terms in excess of
one year, as of December 31, 1998.
<TABLE>
<CAPTION>
After
(Millions) 1999 2000 2001 2002 2003 2003 Total
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum lease payments $65 $47 $31 $22 $16 $61 $242
</TABLE>
<PAGE> 39
Income Taxes
In 1998, the company refinanced debt related to its Employee Stock
Ownership Plan. The provision for income taxes shown below excludes a
$21 million tax benefit related to this refinancing. In 1997, 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 1997
information 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) 1998 1997 1996
<S> <C> <C> <C>
United States $1,326 $2,607 $1,534
International 626 833 945
Total $1,952 $3,440 $2,479
</TABLE>
<TABLE>
Provision for Income Taxes
<CAPTION>
(Millions) 1998 1997 1996
<S> <C> <C> <C>
Currently payable
Federal $ 186 $ 823 $ 331
State 52 127 63
International 308 370 405
Deferred
Federal 149 (57) 76
State 13 (5) 7
International (23) (17) 4
Total $ 685 $1,241 $ 886
</TABLE>
<TABLE>
Components of Deferred Tax Assets
and Liabilities
<CAPTION>
(Millions) 1998 1997
<S> <C> <C>
Accruals currently not deductible
Benefit costs $288 $247
Severance and other restructuring costs 93 --
Product and other claims 254 343
Product and other insurance receivables (439) (404)
Accelerated depreciation (333) (243)
Other 201 260
Net deferred tax asset $ 64 $203
</TABLE>
At December 31, 1998, about $2.643 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 1998 1997 1996
<S> <C> <C> <C>
Statutory U.S. tax rate 35.0% 35.0% 35.0%
State income taxes - net 2.4 2.3 1.8
International income taxes - net .8 .2 .5
All other - net (3.1) (1.4) (1.5)
Effective worldwide tax rate 35.1% 36.1% 35.8%
</TABLE>
<PAGE> 40
Business Segments
Effective at year-end 1998, the company adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information."
Prior period amounts have been restated to conform to the requirements
of this statement.
3M's businesses are organized, managed, and internally reported as
three segments. The segments, which are based on differences in
products, technologies and services, are Industrial and Consumer;
Transportation, Safety and Specialty Material; and Health Care. These
segments 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.
Transactions between reportable segments are recorded at cost. 3M is
an integrated enterprise characterized by substantial intersegment
cooperation, cost allocations and inventory transfers. Therefore,
management does not represent that these segments, if operated
independently, would report the operating income and other financial
information shown.
<TABLE>
<CAPTION>
Business Transportation,
Segment Industrial Safety and Corporate
Information and Specialty Health and Total
(Millions) Consumer Material Care Unallocated Company
<S> <S> <C> <C> <C> <C> <C>
Net sales 1998 $7,714 $4,125 $3,076 $ 106 $15,021
1997 7,774 4,202 3,004 90 15,070
1996 7,377 3,896 2,897 66 14,236
Operating 1998 $1,285 $ 753 $ 600 $ (599)* $ 2,039
income 1997 1,371 808 550 (54)* 2,675
1996 1,256 812 574 (151)* 2,491
Assets** 1998 $5,185 $3,764 $2,168 $3,036 $14,153
1997 5,030 3,296 2,042 2,870 13,238
1996 4,771 3,129 2,012 3,452 13,364
Depreciation 1998 $ 446 $ 236 $ 161 $ 23 $ 866
and 1997 405 261 183 21 870
amortization 1996 425 270 160 28 883
Capital 1998 $ 676 $ 517 $ 221 $ 16 $ 1,430
expenditures 1997 581 563 217 45 1,406
1996 430 445 216 18 1,109
<FN>
<F1>
*Operating income includes unallocated corporate overhead expenses,
some of which historically were allocated to discontinued operations.
Operating income for 1998 includes a $493 million restructuring
charge.
<F2>
**Segment assets primarily include accounts receivable; inventory;
property, plant and equipment - net; and other miscellaneous assets.
Assets included in Corporate and Unallocated principally are cash and
cash equivalents; other securities; insurance receivables; deferred
income taxes; certain investments and other assets; and certain
unallocated property, plant and equipment.
</FN>
</TABLE>
<PAGE> 41
Business Segments (continued)
<TABLE>
Revenue by Classes of Similar Products or Services and Segments* (Unaudited)
<CAPTION>
(Millions) 1998 1997 1996
<S> <C> <C> <C>
Tapes (I&C) $ 2,005 $ 2,080 $ 2,096
Abrasives (I&C) 1,332 1,326 1,270
Automotive products and specialty materials (TS&SM) 1,687 1,647 1,460
Connecting and insulating (I&C) 1,733 1,739 1,564
Consumer and office (I&C) 2,611 2,603 2,460
Health care (HC) 2,540 2,476 2,356
Safety and personal care (TS&SM, HC) 1,497 1,355 1,301
All other products (All) 1,616 1,844 1,729
Total $15,021 $15,070 $14,236
<FN>
<F1>
*Industrial and Consumer (I&C); Transportation, Safety and
Specialty Material (TS&SM); Health Care (HC).
</FN>
</TABLE>
Geographic Areas
Information in the table below is presented on the basis the company
uses to manage its businesses. Export sales and certain income and
expense items are reported within the geographic area where the final
sales to customers are made.
<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 1998 $7,231 $3,850 $2,375 $1,539 $ 26 $15,021
customers 1997 7,242 3,640 2,632 1,530 26 15,070
1996 6,655 3,620 2,577 1,359 25 14,236
Operating 1998 $1,185 $ 516 $ 503 $ 349 $(514)* $ 2,039
income 1997 1,290 431 611 360 (17) 2,675
1996 1,125 463 617 304 (18) 2,491
Property 1998 $3,376 $1,107 $ 709 $ 374 $ -- $ 5,566
plant and 1997 3,133 1,013 532 356 -- 5,034
equipment - 1996 2,842 1,099 598 305 -- 4,844
net
<FN>
<F1>
*Operating income for 1998 includes a $493 million restructuring
charge.
</FN>
</TABLE>
Retirement and Postretirement Benefit Plans
Effective at year-end 1998, the company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." Information for prior years has been restated to conform
to the requirements of this statement.
3M has various company-sponsored retirement plans covering
substantially all U.S. employees and many employees outside the United
States. Pension benefits are based principally on an employee's years
of service and compensation near retirement. In addition to providing
pension benefits, the company provides certain postretirement health
care and life insurance benefits for substantially all of its U.S.
employees who reach retirement age while employed by the company.
Most international employees and retirees are covered by government
health care programs. The cost of company-provided health care plans
for these international employees is not material.
<PAGE> 42
The company's pension 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. A number of plans are maintained by deposits
with insurance companies. In addition, the company has set aside
funds for its U.S. postretirement plan with an independent trustee and
makes periodic contributions to the plan.
<TABLE>
<CAPTION>
Benefit Plan Information Pension Benefits
----------------------------------
U.S. International Other Benefits
--------------- --------------- --------------
(Millions) 1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Reconciliation of benefit obligation
Beginning balance $5,392 $4,800 $1,435 $1,439 $ 995 $ 943
Service cost 130 115 69 52 36 36
Interest cost 377 354 95 96 62 65
Participant contributions - - 6 6 6 6
Foreign exchange rate changes - - 60 (96) - -
Plan amendments 100 1 - - - 5
Actuarial(gain)loss 492 382 194 (20) (2) 1
Benefit payments (290) (260) (44) (42) (67) (61)
Ending balance $6,201 $5,392 $1,815 $1,435 $1,030 $ 995
Reconciliation of plan assets at fair value
Beginning balance $5,411 $4,642 $1,458 $1,369 $ 482 $ 449
Actual return on plan assets 1,018 908 164 165 52 38
Company contributions 83 121 58 47 50 50
Participant contributions - - 6 6 6 6
Foreign exchange rate changes - - 45 (89) - -
Benefit payments (279) (260) (41) (40) (67) (61)
Ending balance $6,233 $5,411 $1,690 $1,458 $ 523 $ 482
Plan assets at fair value
less benefit obligation $ 32 $ 19 $ (125) $ 23 $ (507) $ (513)
Unrecognized transition
(asset) obligation (37) (74) 24 22 - -
Unrecognized prior service cost 179 116 49 51 (48) (59)
Unrecognized (gain) loss (181) (94) 47 (82) 58 95
Net prepaid (payable) recognized $ (7) $ (33) $ (5) $ 14 $ (497) $ (477)
</TABLE>
The company's U.S. nonqualified pension plan had an accumulated
benefit obligation in excess of plan assets in both 1998 and 1997.
The plan's accumulated benefit obligation was $175 million at December
31, 1998, and $143 million at December 31, 1997. There are no plan
assets in the nonqualified plan due its nature.
Certain international pension plans were underfunded. As of year-end
1998 and 1997, the accumulated benefit obligations of these plans were
$418 million and $84 million, respectively, and the assets of these
plans were $384 million and $69 million, respectively. The net
underfunded amount is included in other liabilities in the
Consolidated Balance Sheet.
<PAGE> 43
<TABLE>
<CAPTION>
Benefit Plan Information Pension Benefits
-----------------------------------------
U.S. International Other Benefits
------------------ ------------------ ------------------
(Millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost
Service cost $130 $115 $121 $ 80 $ 67 $ 69 $ 36 $ 36 $ 36
Interest cost 377 354 332 95 96 94 62 65 66
Expected return on assets (440) (381) (349) (103) (106) (97) (32) (28) (26)
Amortization of transition
(asset) obligation (37) (37) (37) (1) (1) (1) - - -
Amortization of prior service
cost 38 36 38 8 9 9 (11) (11) (6)
Recognized net actuarial
(gain) loss - - (6) 3 (1) - - 1 (9)
Net periodic benefit cost $ 68 $ 87 $ 99 $ 82 $ 64 $ 74 $ 55 $ 63 $ 61
Weighted average assumptions
Discount rate 6.50% 7.00% 7.50% 5.58% 6.47% 7.10% 6.50% 7.00% 7.50%
Expected return on assets 9.00% 9.00% 9.00% 6.72% 7.03% 7.68% 6.25% 6.25% 6.25%
Compensation rate increase 4.65% 4.85% 4.85% 4.02% 4.35% 5.60% 4.65% 4.85% 4.85%
</TABLE>
The company expects its health care cost trend rate for postretirement
benefits to slow from 6.4 percent in 1999 to 5.0 percent in 2004,
after which the rate is expected to stabilize. A one percentage point
change in the assumed health care cost trend rates would have the
following effects.
<TABLE>
<CAPTION>
1 Percentage 1 Percentage
(Millions) Point Increase Point Decrease
<S> <C> <C>
Effect on current year's benefit expense $ 12 $ (10)
Effect on benefit obligation 102 (84)
</TABLE>
<PAGE> 44
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 company 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
majority of the company's contributions under 401(k) employee savings
plans. Total ESOP shares are considered to be shares outstanding for
earnings per share calculations.
In 1998, the ESOP refinanced its existing debt by issuing new debt of
$385 million at an interest rate of 5.62 percent. This refinancing
extended the life of the original ESOP from 2004 to 2009. The company
incurred a one-time charge of $59 million ($38 million after tax, or
$0.09 per diluted share), which is reported as an extraordinary loss
from early extinguishment of debt.
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. Over the life of the
notes, shares are released for allocation to participants based on the
ratio of the current year's debt service to the remaining debt service
prior to the current payment.
The ESOP has been the primary funding source for the company's
employee savings plans. Expenses related to the ESOP generally
represent total debt service on the notes, less dividends. The
company contributes treasury shares to employee savings plans to cover
obligations not funded by the ESOP. These amounts are reported as an
employee benefit expense. Unearned compensation, shown as a reduction
of stockholders' equity, is reduced symmetrically as the ESOP makes
principal payments.
<TABLE>
<CAPTION>
ESOP Information
(Millions) 1998 1997 1996
<S> <C> <C> <C>
Dividends on shares held by the ESOP $ 31 $ 30 $ 28
Company contributions to the ESOP 44 37 37
Interest incurred on ESOP notes 29 32 34
Expenses related to the ESOP 37 36 36
</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 1998 1997 1996
<S> <C> <C> <C>
Allocated 6,586,192 6,006,099 5,202,188
Committed to be released 85,153 184,181 399,220
Unreleased 7,457,885 8,286,949 9,103,730
Total ESOP shares 14,129,230 14,477,229 14,705,138
</TABLE>
<PAGE> 45
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, options are granted on the first
business day and exercised on the last business day of the same month.
Previously, GESPP options were exercised within 27 months from the
date of grant.
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -----------------
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
Granted 1,271,120 69.91 1,123,358 77.50 1,498,538 58.78
Exercised (1,271,120) 69.91 (1,293,282) 74.67 (1,501,011) 55.67
Canceled -- -- (122,571) 71.21 (55,837) 52.07
December 31 -- -- -- -- 292,495 $62.35
Options exercisable-
December 31 -- -- -- -- 84,893 $63.87
Shares available for grant-
December 31 10,521,542 11,792,662 12,793,449
<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 10,594 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 prices were
adjusted in 1996, resulting in no economic impact to participants or
the company.
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
Exercise Exercise Exercise
Shares Price* Shares Price* Shares Price*
<S> <C> <C> <C> <C> <C> <C>
Under option-
January 1 26,831,852 $59.75 26,487,335 $52.61 23,974,715 $47.93
Granted 5,872,537 92.78 5,598,761 91.25 5,810,480 65.54
Imation Corp.
Adjustment -- -- -- -- 1,097,520 50.07
Exercised (3,300,215) 47.76 (5,241,804) 46.99 (4,225,544) 43.11
Canceled (73,625) 93.35 (12,440) 91.70 (169,836) 53.17
December 31 29,330,549 $67.72 26,831,852 $59.75 26,487,335 $52.61
Options exercisable-
December 31 24,031,395 $62.09 21,673,983 $52.12 20,462,410 $49.54
Shares available for grant-
December 31 30,123,936 35,968,913 6,555,234
<FN>
<F1>
*Weighted average
</FN>
</TABLE>
<PAGE> 46
Management Stock Ownership Program (continued)
<TABLE>
Options Outstanding and Exercisable at December 31, 1998
<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>
$34.76-47.00 5,476,178 34 $41.79 5,476,178 $41.79
48.00-64.00 11,932,262 80 57.03 11,932,262 57.03
67.00-98.60 11,922,109 106 90.33 6,622,955 87.99
<FN>
<F1>
*Weighted average
</FN>
</TABLE>
Stock-Based Compensation
No compensation cost has been recognized for the General Employees'
Stock Purchase Plan (GESPP) or the Management Stock Ownership Program
(MSOP). Pro forma amounts based on the options' estimated fair value,
net of tax, 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) 1998 1997 1996
<S> <C> <C> <C>
Net income
As reported $1,175 $2,121 $1,526
Pro forma 1,072 2,032 1,439
Earnings per share - basic
As reported $ 2.91 $ 5.14 $3.65
Pro forma 2.66 4.92 3.44
Earnings per share - diluted
As reported $ 2.88 $ 5.06 $3.62
Pro forma 2.63 4.85 3.41
</TABLE>
The weighted average fair value per option granted during 1998, 1997
and 1996 was $12.34, $13.67 and $10.37, respectively, for the GESPP,
and $20.41, $21.81 and $13.43, respectively, for the incentive MSOP
grants. The weighted average fair value was calculated by using the
fair value of each option on the date of grant. The fair value of
GESPP options was based on the 15 percent purchase discount. For MSOP
options the fair value was calculated utilizing the Black-Scholes
option-pricing model and the assumptions that follow.
<TABLE>
<CAPTION>
MSOP Assumptions 1998 1997 1996
<S> <C> <C> <C>
Risk-free interest rate 5.7% 6.6% 6.4%
Dividend growth rate 5.8% 5.8% 4.3%
Volatility 17.6% 15.0% 14.2%
Expected life (months) 69 67 66
</TABLE>
The GESPP and MSOP options, if exercised, would have the following
dilutive effect on shares outstanding for 1998, 1997 and 1996,
respectively: 4.7 million, 6.0 million and 3.9 million shares.
Beginning July 1997, GESPP options had no dilutive effect. MSOP
options to purchase 10.8 million shares of common stock at an average
price of $92.14 were outstanding at year-end 1998. These MSOP options
were not included in the computation of diluted earnings per share
because they would not have had a 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> 47
<TABLE>
Quarterly Data (Unaudited)
(Millions, except per-share amounts)
<CAPTION>
First Second Third Fourth Year
<S> <C> <C> <C> <C> <C>
Net sales
1998 $ 3,700 $ 3,770 $ 3,766 $ 3,785 $15,021
1997 3,714 3,817 3,826 3,713 15,070
Cost of goods sold*
1998 $ 2,096 $ 2,162 $ 2,219 $ 2,267 $ 8,744
1997 2,089 2,156 2,173 2,162 8,580
Income before extraordinary loss*
1998 $ 400 $ 386 $ 178 $ 249 $ 1,213
1997 410 418 927 366 2,121
Net income*
1998 $ 400 $ 386 $ 178 $ 211 $ 1,175
1997 410 418 927 366 2,121
Basic earnings per share - income before extraordinary loss*
1998 $ .99 $ .95 $ .44 $ .62 $ 3.01
1997 .99 1.01 2.25 .90 5.14
Basic earnings per share - net income*
1998 $ .99 $ .95 $ .44 $ .52 $ 2.91
1997 .99 1.01 2.25 .90 5.14
Diluted earnings per share - income before extraordinary loss*
1998 $ .98 $ .94 $ .44 $ .61 $ 2.97
1997 .97 .99 2.21 .89 5.06
Diluted earnings per share - net income*
1998 $ .98 $ .94 $ .44 $ .52 $ 2.88
1997 .97 .99 2.21 .89 5.06
Stock price comparisons (NYSE composite transactions)
1998 High $ 96.13 $ 97.88 $ 84.44 $ 87.50 $ 97.88
1998 Low 80.06 80.38 65.63 69.38 65.63
1997 High 93.25 105.50 104.50 101.19 105.50
1997 Low 80.00 80.13 86.00 81.38 80.00
<FN>
<F1>
*Third quarter 1998 includes a total restructuring charge of $332
million ($214 million after tax, or $.53 per diluted share); fourth
quarter 1998 includes a total restructuring charge of $161 million
($99 million after tax, or $.25 per diluted share), and an
extraordinary loss from early extinguishment of debt of $38 million
after tax, or $.09 per diluted share. The inventory portion of the
restructuring charge, included in cost of goods sold, totaled $29
million in third quarter 1998 and $10 million in fourth quarter 1998.
Third quarter 1997 includes a gain on the sale of National Advertising
Company of $803 million ($495 million after tax, or $1.18 per diluted
share).
</FN>
</TABLE>
<PAGE> 48
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), with the exception of the executive officers
section of Item 10, which is included in Item 1 of this Form 10-K.
The registrant will file with the Commission a definitive proxy
statement pursuant to Regulation 14A by April 30, 1999.
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 25.
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 December 16, 1998.
In a release dated December 16, 1998, the company announced that it
expects fourth-quarter 1998 earnings to be below those in the same
quarter last year. The new release also contained forward-looking
statements relating to the fourth quarter of 1998 and full year 1999.
The news release was attached as Exhibit 99 to the Form 8-K.
<PAGE> 49
(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 contained
unit plan and other compensation in issuer's proxy statement
arrangements. for the 1999 annual
shareholders' meeting.
Reference (pages)
Form 10-K
Submitted herewith:
(12) Calculation of ratio of earnings
to fixed charges. 51
(21) Subsidiaries of the registrant. 52
(23) Consent of experts. 53
(24) Power of attorney. 54
(27) Financial data schedule for the year ended
December 31, 1998 (EDGAR filing only).
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of l934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MINNESOTA MINING AND MANUFACTURING COMPANY
By /s/ Giulio Agostini
Giulio Agostini, Senior Vice President
Principal Financial and Accounting Officer
February 11, 1999
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 February 11,
1999.
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
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> 51
<TABLE>
EXHIBIT 12
MINNESOTA MINING AND MANUFACTURING COMPANY
AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income from continuing operations
before income taxes,
minority interest and
extraordinary loss* $1,952 $3,440 $2,479 $2,168 $2,011
Add:
Interest on debt 139 94 79 102 70
Interest component of the ESOP
benefit expense 29 32 34 37 39
Portion of rent under operating
leases representative of
the interest component 41 41 46 51 46
Less:
Equity in undistributed income
of 20-50 percent owned
companies 4 3 - 1 2
TOTAL EARNINGS AVAILABLE
FOR FIXED CHARGES $2,157 $3,604 $2,638 $2,357 $2,164
FIXED CHARGES
Interest on debt 139 94 79 102 70
Interest component of the ESOP
benefit expense 29 32 34 37 39
Portion of rent under operating
leases representative of
the interest component 41 41 46 51 46
TOTAL FIXED CHARGES $ 209 $ 167 $ 159 $ 190 $ 155
RATIO OF EARNINGS
TO FIXED CHARGES 10.32 21.58 16.59 12.41 13.96
<FN>
<F1>
* 1998 includes a pre-tax restructuring charge of $493 million; 1997
includes a pre-tax gain on the sale of National Advertising Company of
$803 million. These items are discussed in the Notes to Consolidated
Financial Statements. 1995 includes a pre-tax restructuring charge of
$79 million.
</FN>
</TABLE>
<PAGE> 52
<TABLE>
EXHIBIT 21
MINNESOTA MINING AND MANUFACTURING COMPANY
AND CONSOLIDATED SUBSIDIARIES
PARENT AND SUBSIDIARIES
<CAPTION>
Percentage of
Voting Securities
Organized 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 LLC 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 China Limited China 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.
</F1>
</TABLE>
<PAGE> 53
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 8, 1999, on our audits of the consolidated financial
statements of Minnesota Mining and Manufacturing Company and
Subsidiaries as of December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998, which report is
included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Paul, Minnesota
February 11, 1999
<PAGE> 54
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, 1998, 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 8th day of February, 1999.
/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/ Rozanne L. Ridgway
Edward A. Brennan, Director Rozanne L. Ridgway, Director
/s/ Edward R. McCracken /s/ Frank Shrontz
Edward R. McCracken, Director Frank Shrontz, Director
/s/ W. George Meredith /s/ F. Alan Smith
W. George Meredith, Director F. Alan Smith, Director
/s/ Ronald A. Mitsch /s/ Louis W. Sullivan
Ronald A. Mitsch, Director Louis W. Sullivan, Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED BALANCE SHEET
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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 211
<SECURITIES> 237
<RECEIVABLES> 2,666
<ALLOWANCES> 0
<INVENTORY> 2,219
<CURRENT-ASSETS> 6,318
<PP&E> 13,397
<DEPRECIATION> 7,831
<TOTAL-ASSETS> 14,153
<CURRENT-LIABILITIES> 4,386
<BONDS> 1,614
0
0
<COMMON> 236
<OTHER-SE> 5,700
<TOTAL-LIABILITY-AND-EQUITY> 14,153
<SALES> 15,021
<TOTAL-REVENUES> 15,021
<CGS> 8,744
<TOTAL-COSTS> 8,744
<OTHER-EXPENSES> 454
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 139
<INCOME-PRETAX> 1,952
<INCOME-TAX> 685
<INCOME-CONTINUING> 1,213
<DISCONTINUED> 0
<EXTRAORDINARY> (38)
<CHANGES> 0
<NET-INCOME> 1,175
<EPS-PRIMARY> 2.91
<EPS-DILUTED> 2.88
</TABLE>
