The Minnesota Mining and Manufacturing Company (3M) Form 10-Q for the
period ended September 30, 1998, filed on November 6, 1998, via EDGAR
has been amended (Form 10-Q/A). The inventory portion of the
restructuring charge ($29 million) has been reclassified in the
Consolidated Statement of Income and Consolidated Statement of Cash Flows
to be consistent with the presentation in the year-end 1998 Form 10-K.
In the Consolidated Statement of Income, the inventory portion of the
restructuring charge has been classified as a component of cost of goods
sold. This change did not impact reported operating income. In the
Consolidated Statement of Cash Flows this charge has now been included
as part of "Asset impairment charges", instead of as part of "Working
capital and other changes - net". This change did not impact net cash
provided by operating activities. Related discussion in the
"Restructuring Charge" note and in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" has been updated. The
financial data schedule has been updated to reflect the change in cost
of goods sold and the remaining restructuring charge has been included
in other expenses.
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended September 30, 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
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes X . No .
On September 30, 1998, there were 401,345,869 shares of the
Registrant's common stock outstanding.
This document contains 31 pages.
The exhibit index is set forth on page 28.
<PAGE> 2
<TABLE>
Minnesota Mining and Manufacturing Company and Subsidiaries
PART I. Financial Information
Consolidated Statement of Income
(Amounts in millions, except per-share amounts)
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $3,766 $3,826 $11,236 $11,357
Operating expenses
Cost of goods sold 2,190 2,173 6,448 6,418
Restructuring charge-
inventory 29 -- 29 --
Total cost of goods sold 2,219 2,173 6,477 6,418
Selling, general and
administrative expenses 947 952 2,838 2,861
Restructuring charge - other 303 -- 303 --
Total 3,469 3,125 9,618 9,279
Operating income 297 701 1,618 2,078
Other income and expense
Interest expense 37 23 106 74
Investment and other
income - net (11) (13) (33) (44)
Gain on divestiture - net (10) (803) (10) (803)
Total 16 (793) 63 (773)
Income before income taxes
and minority interest 281 1,494 1,555 2,851
Provision for income taxes 96 549 552 1,035
Minority interest 7 18 39 61
Net income $ 178 $ 927 $ 964 $1,755
Weighted average common
shares outstanding 402.7 412.5 403.7 414.7
Earnings per share - basic $ 0.44 $ 2.25 $ 2.39 $ 4.23
Weighted average common
and common equivalent
shares outstanding 406.7 419.2 408.7 420.9
Earnings per share - diluted $ 0.44 $ 2.21 $2.36 $4.17
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
</FN>
</TABLE>
<PAGE> 3
<TABLE>
Minnesota Mining and Manufacturing Company and Subsidiaries
Consolidated Balance Sheet
(Dollars in millions)
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 204 $ 230
Other securities 177 247
Accounts receivable - net 2,664 2,434
Inventories
Finished goods 1,324 1,293
Work in process 636 605
Raw materials and supplies 468 501
Total inventories 2,428 2,399
Other current assets 1,017 858
Total current assets 6,490 6,168
Investments 623 613
Property, plant and equipment 12,995 12,098
Less accumulated depreciation (7,684) (7,064)
Property, plant and equipment - net 5,311 5,034
Other assets 1,541 1,423
Total $13,965 $13,238
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 878 $ 898
Payroll 466 306
Income taxes 261 238
Short-term debt 1,696 1,499
Other current liabilities 1,199 1,042
Total current liabilities 4,500 3,983
Other liabilities 2,155 2,314
Long-term debt 1,426 1,015
Stockholders' equity - net 5,884 5,926
Shares outstanding
September 30, 1998, 401,345,869
December 31, 1997, 404,724,947
________ ________
Total $13,965 $13,238
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
</FN>
</TABLE>
<PAGE> 4
<TABLE>
Minnesota Mining and Manufacturing Company and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(Dollars and shares in millions, except per-share amounts)
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Common stock and capital in excess of
par value at beginning and end of period $ 296 $ 296 $ 296 $ 296
Retained earnings
Balance at beginning of period 10,081 9,061 9,848 8,756
Net income (A) 178 927 964 1,755
Dividends paid (per share:
$0.55, $0.53, $1.65, $1.59) (221) (220) (666) (661)
Stock option plans and other (13) (24) (121) (106)
Balance at end of period 10,025 9,744 10,025 9,744
Accumulated other comprehensive income - net
Balance at beginning of period
Cumulative foreign currency translation
adjustments (624) (302) (547) (178)
Unrealized gain on securities - net 8 5 8 15
Other comprehensive income
Foreign currency translation and other
adjustments - net (B) 71 (92) (6) (216)
Unrealized gain (loss) on
securities - net (C) (3) 2 (3) (8)
Balance at end of period
Cumulative foreign currency translation
adjustments (553) (394) (553) (394)
Unrealized gain on securities - net 5 7 5 7
Balance at end of period (548) (387) (548) (387)
Unearned compensation - ESOP
Balance at beginning of period (360) (396) (379) (412)
Amortization 10 8 29 24
Balance at end of period (350) (388) (350) (388)
Treasury stock, at cost
Balance at beginning of period
(shares: 68.1, 56.5, 67.3, 55.2) (3,357) (2,315) (3,300) (2,193)
Reacquired stock
(shares: 3.1, 7.9, 7.3, 13.6) (229) (728) (606) (1,229)
Issuances pursuant to stock option plans
(shares: 0.5, 1.1, 3.9, 5.5) 47 102 367 481
Balance at end of period (3,539) (2,941) (3,539) (2,941)
(shares: 70.7, 63.3, 70.7, 63.3)
Stockholders' equity - net $ 5,884 $ 6,324 $ 5,884 $ 6,324
Total comprehensive income (A + B + C) $ 246 $ 837 $ 955 $ 1,531
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
</FN>
</TABLE>
<PAGE> 5
<TABLE>
Minnesota Mining and Manufacturing Company and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in millions)
(Unaudited)
<CAPTION>
Nine months ended
September 30
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 964 $1,755
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 644 654
Asset impairment charges 190 --
Gain on divestiture - net (10) (803)
Income tax payable relating to divestiture 4 308
Implant litigation - net (209) 130
Working capital and other changes - net (85) (386)
Net cash provided by continuing operations 1,498 1,658
Net cash used by discontinued operations -- (92)
Net cash provided by operating activities 1,498 1,566
Cash Flows from Investing Activities
Capital expenditures (1,056) (1,002)
Proceeds from National Advertising Company divestiture -- 1,000
Other changes - net (68) 37
Net cash (used) provided by investing activities (1,124) 35
Cash Flows from Financing Activities
Change in short-term debt - net 145 (90)
Repayment of long-term debt (52) (546)
Proceeds from long-term debt 556 334
Purchases of treasury stock (606) (1,229)
Reissuances of treasury stock 245 294
Payment of dividends (666) (661)
Other (19) (22)
Net cash used in financing activities (397) (1,920)
Effect of exchange rate changes on cash (3) 42
Net decrease in cash and cash equivalents (26) (277)
Cash and cash equivalents at beginning of year 230 583
Cash and cash equivalents at end of period $ 204 $ 306
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
</FN>
</TABLE>
<PAGE> 6
Minnesota Mining and Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair presentation
of financial position, results of operations and cash flows for the
periods presented. These adjustments consist of normal, recurring
items, except for the restructuring charge recorded in the third
quarter of 1998. The results of operations for any interim period
are not necessarily indicative of results for the full year. The
condensed consolidated financial statements and notes are presented
as permitted by the requirements for Form 10-Q and do not contain
certain information included in the company's annual consolidated
financial statements and notes. This Form 10-Q should be read in
conjunction with the company's consolidated financial statements and
notes included in its 1997 Annual Report on Form 10-K.
Restructuring Charge:
3M is rationalizing product lines that have marginal returns and/or a
decreasing strategic fit; consolidating some manufacturing
operations; and identifying and eliminating lower-value activities.
As a result of these initiatives, by the end of 1999, including
personnel reductions in the second half of 1998, the company expects
a total reduction of 4,500 employees.
In the third quarter of 1998, in connection with this plan to improve
productivity and reduce costs, the company recorded a restructuring
charge of $332 million ($214 million after-tax). Major components of
this estimated charge include $161 million related to the write-down
of certain assets to net realizable value, $102 million of employee
severance and related costs, $40 million relating to losses on
business dispositions and other costs, and $29 million relating
to inventory write-downs. These components are reflected on the
consolidated balance sheet as a reduction in property, plant and
equipment - net, and as accruals in payroll, other current liabilities,
and inventory, respectively. The inventory write-down of $29 million,
which has been classified as a component of cost of goods sold, is for
certain product lines that are being discontinued. As of September 30,
1998, only minimal payments had been made relating to the restructuring
charge.
The severance and related costs component of the restructuring charge
does not represent all of the amounts to be recorded in connection
with the separation of the employees referred to above. The company
expects additional charges relating to productivity improvement as
the assessment of the employees impacted and communication of
severance benefits to affected employees is finalized. Restructuring
charges, including the third quarter 1998 charge, are expected to
total about $500 million.
<PAGE> 7
Derivatives and Hedging Activities:
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, which are quite
complex. Although the company expects that this standard will not
materially affect its financial position and results of operations,
it has not yet determined the impact of this standard on its
financial statements.
Debt issuances:
In October 1998, a Japanese subsidiary of the company, Sumitomo 3M
Limited, completed a 5-year, 10 billion yen (approximately $85
million), 0.795 percent fixed rate private placement note.
In July 1998, a German subsidiary of the company, 3M Deutschland
GmbH, completed a 3-year, $200 million, 5.75 percent Eurobond
offering. After giving effect to an interest rate swap, the company
will have an interest obligation based on a floating LIBOR index.
Comprehensive income:
Effective January 1, 1998, the company adopted Statement of Financial
Accounting Standards 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.
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 the Management Stock Ownership Program stock
options for the three-month and nine-month periods ended September
30, 1998 and 1997. Effective July 1997, all General Employees' Stock
Purchase Plan options are exercised on the last business day of each
month of grant, resulting in no dilutive effect.
Other:
Discussion of legal matters is cross-referenced to this Form 10-Q,
Part II, Item 1, Legal Proceedings, and should be considered an
integral part of the Consolidated Financial Statements and Notes.
PricewaterhouseCoopers LLP, the company's independent auditors, have
performed a review of the unaudited interim financial statements
included herein and their review report thereon accompanies this
filing.
<PAGE> 8
Review Report of Independent Auditors
To the Stockholders of Minnesota Mining and Manufacturing Company:
We have reviewed the accompanying condensed consolidated balance
sheet of Minnesota Mining and Manufacturing Company and Subsidiaries
as of September 30, 1998, and the related condensed consolidated
statements of income and changes in stockholders' equity for the
three-month and nine-month periods ended September 30, 1998 and 1997,
and cash flows for the nine-month periods ended September 30, 1998
and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the condensed consolidated financial
statements referred to above for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31,
1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated February 9, 1998, except
for the last paragraph under Debt in the Notes to Consolidated
Financial Statements, as to which the date is February 18, 1998, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31,
1997, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Paul, Minnesota
October 22, 1998
<PAGE> 9
Minnesota Mining and Manufacturing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Third Quarter
Worldwide sales for the third quarter totaled $3.766 billion, down
1.6 percent from the third quarter last year. Excluding changes in
currency exchange rates, sales rose about 2 percent. Worldwide
volume and selling prices were both up about 1 percent.
In the United States, sales decreased about 1 percent to $1.892
billion. Adjusting for the third-quarter 1997 sale of the outdoor
advertising business, sales rose about 1 percent. A number of U.S.
businesses posted good growth, with gains in consumer, office, and
safety and security businesses. The company experienced soft demand
in businesses serving the electronics, transportation safety and
industrial markets. In electronics, U.S. sales of several product
lines -- including connectors, chip transport media, performance
chemicals, and bonding systems -- were impacted by industry weakness,
as well as by shifts in customer production to Asia. In
transportation safety, the enactment of the new federal highway
funding law has not yet translated into increased demand for
reflective sheetings. 3M expects benefits from this new funding act
to begin in 1999. In industrial markets, abrasive, tape and other
industrial businesses have been negatively affected by industry
slowdowns.
Internationally, sales totaled $1.874 billion. Overall, local-
currency sales gains of about 5 percent, driven about equally between
volume and selling prices, were more than offset by currency
translation. Expressed in dollars, international sales declined 2
percent. The company increased selling prices in all major
geographic areas, helping to offset part of the currency devaluation.
Currency translation reduced international sales by about 7 percent.
In Europe, volume increased about 3 percent. Good volume gains were
posted in Germany, Spain and in the Nordic region, but volume was up
only 2 percent in France and was flat in the U.K. In Eastern Europe,
where 3M has traditionally posted volume gains of about 20 percent,
unit sales rose about 2 percent, impacted by the spillover from the
Russian economic instability. In the Asia Pacific area, volume was
flat. In Japan, despite the continuing recession, volume increased
about 5 percent. In Asia outside Japan, volume declined about 7
percent. 3M posted solid gains in Singapore and China, but was
negatively affected by the economic turmoil in Korea, Hong Kong,
Thailand and Malaysia. In Latin America, volume increased 3 percent,
due to economic slowing brought about by the Asian and Russian
instability. In Brazil and Argentina volume was flat for the
quarter. In Mexico, unit sales increased about 5 percent. In Canada,
volume increased about 11 percent.
<PAGE> 10
The cost of goods sold discussion that follows excludes the inventory
portion of the restructuring charge.
Cost of goods sold, which includes manufacturing, research and
development, and engineering, was 58.1 percent of sales, up 1.3
percentage points from the third quarter last year. Gross margins
benefited from higher selling prices and lower raw material costs.
However, the effects of currency exchange rates and low volume growth
more than offset these benefits. Currency reduced gross margins by
seven-tenths of a percentage point. The currency effect relates to
the impact of currency fluctuations on the transfer of goods between
3M operations in the United States and abroad.
Selling, general and administrative spending was 25.2 percent of
sales, up slightly as a percent of sales from the same quarter last
year, but down $5 million.
During the third quarter, 3M recorded a $332 million ($214 million
after-tax) restructuring charge. Details of the restructuring charge
are discussed in the Notes to Consolidated Financial Statements.
The operating income discussion that follows excludes the
restructuring charge. Worldwide operating income was 16.7 percent of
sales, down 1.6 percentage points from the third quarter last year.
Margins were down nearly 3 percentage points in the United States and
four-tenths of a point internationally. Operating income was $629
million, down 10.3 percent from the year-earlier quarter. Currency
reduced operating income by about $55 million, or 8 percent.
Third quarter interest expense of $37 million was up $14 million from
the same quarter last year, reflecting a moderate increase in the
company's financial leverage. Net investment and other income was
$11 million, in line with the level averaged in each of the past four
quarters. The third quarter of 1998 reflects a $10 million
adjustment to finalize the accounting for the 1997 divestiture of
National Advertising Company.
The impact of the 1998 restructuring charge and the 1997 gain on
divestiture on 3M's income statement and tax rate is summarized in
the following table.
<PAGE> 11
<TABLE>
Supplemental Consolidated Statement of Income Information (Unaudited)
(Millions, except per-share amounts)
Three months ended
<CAPTION>
September 30, 1998 September 30, 1997
Excluding
Restruc- Restruc- Excluding Gain on
turing turing Reported Dives- Dives- Reported
Charge Charge Total titure titure Total
<S> <C> <C> <C> <C> <C> <C>
Operating income $ 629 $ (332) $ 297 $ 701 $ -- $ 701
Other income and
expense 16 -- 16 10 (803) (793)
Income before income
taxes and minority
interest $ 613 $ (332) $ 281 $ 691 $ 803 $ 1,494
Provision for income
taxes 214 (118) 96 241 308 549
Effective tax rate 35.0% 35.5% 34.3% 35.0% 38.4% 36.8%
Minority interest 7 -- 7 18 -- 18
Net income $ 392 $ (214) $ 178 $ 432 $ 495 $ 927
Earnings per
share - diluted $ 0.97 $(0.53) $ 0.44 $ 1.03 $ 1.18 $ 2.21
</TABLE>
Excluding the 1998 restructuring charge and the 1997 gain on
divestiture, the worldwide effective income tax rate for the quarter
was 35.0 percent, the same as in the third quarter last year. The
1998 restructuring charge was taxed at a rate of 35.5 percent. The
1997 gain on divestiture was taxed fully in the United States 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). This results in a
total 3M combined effective tax rate of 34.3 percent for the third
quarter, compared to 36.8 percent in the third quarter last year.
Net income totaled $178 million, or $0.44 per diluted share, compared
with $927 million, or $2.21 per diluted share, in the third quarter
of 1997. Excluding the 1998 restructuring charge and the 1997 gain
on divestiture, net income totaled $392 million, or $0.97 per diluted
share, compared with $432 million, or $1.03 per diluted share, in the
third quarter of 1997. The company estimates that changes in the
value of the U.S. dollar decreased earnings for the quarter by about
8 cents per share compared with the third quarter of 1997. This
estimate includes the effect of translating profits from local
currencies into U.S. dollars; the impact of currency fluctuations on
the transfer of goods between 3M operations in the United States and
abroad; and transaction gains and losses.
Year-to-date
On a year-to-date basis, worldwide sales totaled $11.236 billion,
down about 1 percent from the same period last year. Excluding
changes in currency exchange rates, sales rose about 3 percent. Unit
sales increased about 2 percent, while selling prices were up about 1
percent.
<PAGE> 12
In the United States, sales decreased slightly to $5.457 billion.
Adjusting for the third-quarter 1997 sale of the outdoor advertising
business, sales rose about 2 percent. Internationally, sales totaled
$5.779 billion, with local-currency sales gains more than offset by
currency translation. Expressed in dollars, international sales
declined 2 percent. Volume increased about 5 percent and selling
prices were up 2 percent. Currency translation reduced international
sales by about 9 percent.
The cost of goods sold discussion that follows excludes the inventory
portion of the restructuring charge.
Cost of goods sold, which includes manufacturing, research and
development, and engineering, was 57.3 percent of sales, up eight-
tenths of a percentage point from the same period last year. The
factors that influenced gross margins for the third quarter were the
same factors that affected the year-to-date results.
Selling, general and administrative spending was 25.3 percent of
sales, up slightly as a percent of sales from the same period last
year, but down $23 million.
The operating income discussion that follows excludes the
restructuring charge. Worldwide operating income was 17.4 percent of
sales, down nine-tenths of a percentage point from the same period
last year. Margins were down 1.7 percentage points in the United
States and down slightly internationally. Operating income was
$1.950 billion, down 6.2 percent from the year-earlier period.
Currency reduced operating income by about $200 million, or 10
percent.
Interest expense of $106 million was up $32 million from the first
nine months of last year, reflecting the company's strategy to lower
its cost of capital by moderately increasing its financial leverage.
This strategy may increase interest expense by about $50 million for
total year 1998 when compared to 1997. Net investment and other
income was $33 million, in line with recent trends.
The impact of the 1998 restructuring charge and the 1997 gain on
divestiture on 3M's income statement is summarized in the following
table.
<PAGE> 13
<TABLE>
Supplemental Consolidated Statement of Income Information (Unaudited)
(Millions, except per-share amounts)
Nine months ended
<CAPTION>
September 30, 1998 September 30, 1997
Excluding
Restruc- Restruc- Excluding Gain on
turing turing Reported Dives- Dives- Reported
Charge Charge Total titure titure Total
<S> <C> <C> <C> <C> <C> <C>
Operating income $1,950 $ (332) $ 1,618 $ 2,078 $ -- $ 2,078
Other income and
expense 63 -- 63 30 (803) (773)
Income before income
taxes and minority
interest $1,887 $ (332) $ 1,555 $ 2,048 $ 803 $ 2,851
Provision for income
taxes 670 (118) 552 727 308 1,035
Effective tax rate 35.5% 35.5% 35.5% 35.5% 38.4% 36.3%
Minority interest 39 -- 39 61 -- 61
Net income $1,178 $ (214) $ 964 $ 1,260 $ 495 $ 1,755
Earnings per
share - diluted $ 2.88 $(0.52) $ 2.36 $ 2.99 $ 1.18 $ 4.17
</TABLE>
The worldwide effective income tax rate for the first nine months was
35.5 percent, the same as the tax rate (excluding the gain on
divestiture) in the same period last year.
Net income totaled $964 million, or $2.36 per diluted share, compared
with $1.755 billion, or $4.17 per diluted share, in the first nine
months of 1997. Excluding the 1998 restructuring charge and the 1997
gain on divestiture, net income totaled $1.178 billion, or $2.88 per
diluted share, compared with $1.260 billion, or $2.99 per diluted
share, in the first nine months of 1997. The company estimates that
changes in the value of the U.S. dollar decreased earnings for the
first nine months by about 29 cents per share compared with the same
period in 1997. This estimate includes the effect of translating
profits from local currencies into U.S. dollars; the impact of
currency fluctuations on the transfer of goods between 3M operations
in the United States and abroad; and transaction gains and losses.
FUTURE OUTLOOK
3M expects higher fourth-quarter 1998 sales and earnings compared
with the same quarter last year, excluding the impact of any
additional restructuring charges taken in the fourth quarter of 1998.
The company expects to take additional restructuring charges related
to productivity improvement initiatives in the fourth quarter of 1998
and possibly into 1999, which would bring total restructuring charges
to an estimated $500 million. Currency, due to purchased goods
effects, is expected to reduce earnings in the fourth quarter of 1998
by about 5 cents per share.
Results are expected to benefit from 3M's cost reduction efforts. 3M
has an 8 percent annual productivity improvement objective, as
measured by sales growth per employee in local currencies. Due to
the turmoil in the Asia Pacific area and softness in certain
businesses in
<PAGE> 14
the United States, 1998 productivity will not meet the 8 percent
target for the first time in 4 years. During the third quarter of
1998, employment declined about 1,600 people, about 1,000 people
excluding summer temporary workers. The company expects to reduce up
to an additional 1,000 positions by the end of 1998. By the end of
1999, including personnel reductions in the second half of 1998, the
company expects a total reduction of 4,500 employees. These actions
should help the company regain and sustain its 8 percent productivity-
improvement target.
The company is monitoring worldwide business conditions closely and
will adjusts prices, costs and investments as appropriate. Overall,
the company has experienced earnings declines of about 20 percent in
the Asia Pacific area for the first nine months of 1998. The company
does not expect a significant change in this situation in the fourth
quarter of 1998. 3M expects that the Latin American economies will
continue to decelerate. 3M is also cautious about the near-term
outlook for the U.S. and European economies. Given this scenario, 3M
expects modest sales growth in the fourth quarter when compared with
the same quarter last year.
For total year 1998, the company expects to buy back about 9 million
shares of 3M stock. This is expected to result in shares outstanding
at year-end 1998, net of issuances, of about one percent less when
comparing to year-end 1997 balances.
IMPACT OF THE YEAR 2000 ISSUE
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 operations.
The company recognizes the importance of the Year 2000 issue 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 products and IT and non-IT systems (defined below) so that
they will perform as intended, regardless of the date (before, during
and after December 31, 1999), and 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 lab equipment, environmental and safety systems,
facilities and utilities, and date-sensitive company products; and
(iii) the readiness of key third parties, including suppliers and
customers, and the electronic data interchange (EDI) with those key
third parties.
<PAGE> 15
The Year 2000 project team has taken inventory of products and IT and
non-IT systems or components that might malfunction or fail at the
end of the millennium. 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 September 30, 1998, approximately 95% of the
core IT systems (e.g., general ledger, payroll, procurement and order
management) located in the United States that are deemed "Vital" and
"Critical" are Year 2000 Compliant. As of September 30, 1998,
approximately 75% of the IT systems in subsidiaries outside the
United States that are deemed "Vital" and "Critical" are Year 2000
Compliant.
Non-IT Systems - The company has over 100 manufacturing and lab
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. Compliance testing of non-IT
systems often requires shutdown of the manufacturing operations. To
minimize these disruptions, the company has contacted the suppliers
of non-IT systems used in the company's facilities and obtained
statements on whether the system is Year 2000 Compliant. The company
has relied on such vendor statements and tested components of non-IT
systems where the testing does not interrupt manufacturing
operations. As of September 30, 1998, approximately 75% of the
non-IT systems located in the United States that are deemed "Vital"
and "Critical" and approximately 65% of the non-IT systems in
subsidiaries outside the United States that are deemed "Vital" and
"Critical" are believed to be Year 2000 Compliant.
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 disruptions in the
relationship between the company and these important third parties
from the Year 2000 issue. While the company cannot guarantee
compliance by third parties, the company will consider alternate
sources of supply in the event a key supplier cannot demonstrate its
systems or products are Year 2000 Compliant.
Contingency Planning - The primary focus of the Year 2000 project
teams has been directed at making the company's IT and non-IT systems
and products Year 2000 Compliant. The company is working on contingency
plans specifying what the company will do if failures occur in its IT
and non-IT systems or important third parties are not
<PAGE> 16
Year 2000 Compliant. The company expects to have such contingency
plans finalized by March 31, 1999 for its IT and non-IT systems and
by April 30, 1999 for its key suppliers.
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.
Costs - Through September 30, 1998, the company had expensed incremental
costs of $41 million related to the Year 2000 issue. The total
remaining incremental cost is estimated to be approximately $34 million.
The company is expensing as incurred all costs related to the assessment
and remediation of the Year 2000 issue. These costs are being funded
through operating cash flows. The company's total cost for the Year
2000 issue includes estimated costs and time associated with
interfacing with third parties' Year 2000 issues. These estimates
are based on currently available information.
The company's current estimates of the amount of time and costs
necessary to remediate and test its computer systems are based on the
facts and circumstances existing at this time. The estimates were
made using assumptions of future events including the continued
availability of certain resources, Year 2000 modification plans,
implementation success by key third-parties, and other factors. New
developments may occur that 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 codes in both IT and non-IT systems; (iii)
unanticipated failures in its 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 its possible future costs beyond the current estimate
of costs. 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 revisions in costs 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, eleven of the fifteen member countries of the
European Union (EU) will establish fixed conversion rates through the
European Central Bank (ECB) between their existing local currencies
and the Euro, the EU's future single currency. The participating
<PAGE> 17
countries have agreed to adopt the Euro as their common legal
currency on that date. The Euro will then trade on currency
exchanges and be available for non-cash transactions.
Following introduction of the Euro, the local currencies will remain
legal tender between January 1, 1999 and January 1, 2002. During the
transition period, goods and services may be paid for using either
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 first be
converted into the Euro and then converted from the Euro into the
second local currency at the rates fixed by the ECB. Beginning no
later than January 1, 2002, the participating countries will issue
new Euro-denominated bills and coins for use in cash transactions.
By no later than July 1, 2002, the participating countries will
withdraw all bills and coins denominated in local currencies, making
conversion to the Euro 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 teams' objective 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 January 1, 2002 in the participating
countries.
Europe is a significant market for the company, contributing 24% of
consolidated sales and 16% of consolidated operating income in 1997.
The company believes that the Euro will, over time, create increased
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 to some
extent by new business opportunities and efficiencies in what will
become the world's second largest economy. The company, however, is
not able to estimate the anticipated net long-term impact of the
introduction of the Euro on the company.
The company has consolidated its IT operations and made significant
investments in its IT systems in Europe over the past few years 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 by January 1, 1999. During the three-year transition period,
the company anticipates spending approximately $25 million to
complete the conversion to the Euro. The company has not developed
contingency plans at this time since the company believes its IT
systems will be ready by January 1, 2002 for the Euro conversion.
The introduction of the Euro 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 today of
changes in currency exchange rates on the trade within the EU has not
<PAGE> 18
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, however, that
the savings will not be material to corporate results.
The company does have derivatives outstanding beyond January 1, 1999
in several of the European local 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
believes the impact of the introduction of the Euro 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 Quarterly
Report on Form 10-Q 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
which indicate future events and trends identify forward-looking
statements.
Actual future results and trends may differ materially from
historical results or those anticipated depending on a variety of
factors, including, but not limited to: foreign exchange rates and
fluctuations in those rates; the effects of, and changes in,
worldwide economic conditions; raw materials, including shortages and
increases in the costs of key raw materials; the impact of the Year
2000 issue; and legal proceedings (see discussion of Legal
Proceedings in Part II, Item 1 of this Form 10-Q).
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity remain strong.
Working capital decreased $195 million to $1.990 billion at September
30, 1998, compared to $2.185 billion at year-end 1997. The accounts
receivable average days' sales outstanding was 57 days, down slightly
from year-end. The company's key inventory index was 3.8 months,
unchanged from year-end. The company's current ratio was 1.4, down
from 1.5 at year-end.
Total debt increased $608 million from year-end 1997 to $3.122
billion. In line with the company's strategy to lower its cost of
capital, total debt increased from an average of about $2 billion in
1997 to $3.122 billion as of September 30, 1998. As of September 30,
1998, total debt was 35 percent of total capital.
<PAGE> 19
The company's strong credit rating provides ready and ample access to
funds in global capital markets. In February 1998, the parent
company issued $330 million of 30-year, 6.375 percent debentures. In
July 1998, a German subsidiary of the company, 3M Deutschland GmbH,
completed a 3-year, $200 million, 5.75 percent Eurobond offering. In
October 1998, a Japanese subsidiary of the company, Sumitomo 3M
Limited, completed a 5-year, 10 billion yen (approximately $85
million), 0.795 percent fixed rate private placement note. At
September 30, 1998, the company had available short-term lines of
credit totaling about $600 million.
Net cash provided by operating activities from continuing operations
totaled $1.498 billion in the first nine months of the year, down
$160 million from the same period last year. Net cash outflows from
mammary implant litigation were $339 million higher than in the same
period last year. Asset impairment charges of $190 million relate to
the third quarter 1998 restructuring and represent the write-down of
certain assets to net realizable value ($161 million relating to prop-
erty, plant and equipment and an inventory write-down of $29 million).
Working capital and other changes in 1998 includes the impact of the
employee severance and business disposition components of the
restructuring charges.
Timing differences between payment of implant liabilities and receipt
of related insurance recoveries could affect the cash flows of future
periods. This is discussed in Part II, Item 1, Legal Proceedings, of
this Form 10-Q.
Net cash used by operating activities from discontinued operations
was $92 million in the first nine months of 1997. Payments made in
1997 were primarily severance payments related to discontinued
operations.
Cash used in investing activities was $1.124 billion in the first
nine months of the year, compared to cash provided of $35 million in
the same period last year. In 1997, cash proceeds related to the
sale of National Advertising Company totaled $1 billion. Capital
expenditures for the first nine months of 1998 were $1.056 billion,
an increase of 5.5 percent compared with the same period last year.
Treasury stock repurchases for the first nine months of 1998 were
$606 million, compared with repurchases in the same period last year
of $1.229 billion. In the third quarter of 1997, net proceeds from
the National Advertising Company divestiture were primarily used to
repurchase shares and to reduce short-term debt. Financing
activities for both short-term and long-term debt provided net cash
inflows of $649 million, compared with net cash outflows of $302
million in the first nine months last year.
The company repurchased about 7.3 million shares of common stock in
the first nine months of 1998, compared with 13.6 million shares in
the same period last year. In November 1997, the Board of Directors
authorized the repurchase of up to 25 million shares of 3M common
stock through December 31, 1998. As of September 30, 1998, 15.3
million shares remained authorized for repurchase. Stock repurchases
are made to support employee stock purchase plans and for other
corporate purposes.
<PAGE> 20
Cash dividends paid to shareholders totaled $666 million in the first
nine months of this year, compared with $661 million in the same
period last year. In February 1998, the quarterly dividend was
increased to 55 cents a share.
Legal proceedings are discussed in the Legal Proceedings section in
Part II, Item 1, of this Form 10-Q. 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. See discussion of breast implant
litigation in Legal Proceedings, Part II, Item 1.)
The company expects to complete the refinancing of its Employee Stock
Ownership Plan in late 1998 or early 1999, which would result in an
estimated $40 million after tax charge (estimated $0.10 per diluted
share). This would be reported as an extraordinary loss from early
extinguishment of debt.
<PAGE> 21
Minnesota Mining and Manufacturing Company and Subsidiaries
PART II. Other Information
Item 1. Legal Proceedings
The company and certain of its subsidiaries are named as defendants
in a number of actions, governmental proceedings and claims,
including environmental proceedings and products liability claims
involving products now or formerly manufactured and sold by the
company. In some actions, the claimants seek damages as well as
other relief, which, if granted, would require substantial
expenditures. The company has accrued certain liabilities, which
represent reasonable estimates of its probable liabilities for these
matters. The company also has recorded receivables for the probable
amount of insurance recoverable with respect to these matters.
Some of these matters raise difficult and complex factual and legal
issues, and are subject to many uncertainties, including, but not
limited to, the facts and circumstances of each particular action,
the jurisdiction and forum in which each action is proceeding and
differences in applicable law. Accordingly, the company is not
always able to estimate the amount of 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 September 30, 1998, the company had been named as a defendant,
often with multiple co-defendants, in 6,929 lawsuits and 144 claims
in various courts, all seeking damages for personal injuries from
allegedly defective breast implants. These claims and lawsuits
purport to represent 22,757 individual claimants. It is not yet
certain how many of these lawsuits and claims involve products
manufactured and sold by the company, as opposed to other
manufacturers. The company entered the business of manufacturing
breast implants in 1977 by purchasing McGhan Medical Corporation.
In 1984, the company sold the business to a corporation that also
was named McGhan Medical Corporation.
<PAGE> 22
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
<PAGE> 23
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.
The Court ordered that, beginning after November 30, 1995, members
of the plaintiff class may choose to participate in the Revised
Settlement Program or opt out, which would then allow them to
proceed with separate products liability actions.
The Revised Settlement Program as supplemented now includes both
foreign and domestic class members with implants manufactured by
certain manufacturer defendants, including Baxter International,
Bristol Meyers-Squibb, the company and McGhan Medical Corporation.
The company's obligations under the Revised Settlement Program are
limited to eligible claimants with implants manufactured by the
company or its predecessors ("3M implants") or manufactured only by
McGhan Medical Corporation after its divestiture from the company on
August 3, 1984 ("Post 8/84 McGhan implants"). With respect to
foreign claimants and claimants with only Post 8/84 McGhan implants
(or only Post 8/84 McGhan implants plus certain other manufacturers'
implants), the benefits are more limited than for domestic claimants
with 3M implants. Post 8/84 McGhan implant benefits are payable by
the company, Union Carbide Corporation and McGhan Medical
Corporation.
In general, the amounts payable to individual current claimants (as
defined in the Court's order) under the Revised Settlement Program,
and the company's obligations to make those payments, will not be
affected by the number of class members electing to opt out of the
Revised Settlement Program or the number of class members making
claims under the Revised Settlement Program. In addition to certain
miscellaneous benefits, the Revised Settlement Program provides for
two compensation options for current claimants with 3M implants.
Under the first option, denominated as Fixed Amount Benefits,
current claimants with 3M implants who satisfy disease criteria
established in the prior Settlement Agreement will receive amounts
ranging from $5,000 to $100,000, depending on disease severity or
disability level; whether the claimant can establish that her
implants have ruptured; and whether the claimant also has had
implants manufactured by Dow Corning. Under the second option,
denominated as Long-Term Benefits, current claimants with 3M
implants who satisfy more restrictive disease and severity criteria
specified under the Revised Settlement Program can receive benefits
ranging from $37,500 to $250,000.
<PAGE> 24
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 have only Post 8/84
McGhan implants (or only Post 8/84 McGhan implants plus certain
other manufacturers' implants) or who are current foreign claimants
will range from $10,000 to $50,000. A benefit payment of $3,500 for
foreign registrants other than current foreign claimants, so called
Other Registrants, has been agreed to by the Company and the Foreign
Claimants Committee. This benefit thus completes the foreign
claimant aspects of the Revised Settlement Program. A notice to
foreign registrants has been approved by the Court.
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 September 30, 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. This amount represents the company's
best estimate of the minimum amount to cover the cost and expense of
<PAGE> 25
the Revised Settlement Program and the cost and expense of resolving
opt-out claims and recovering insurance proceeds. After subtracting
payments of $912 million as of September 30, 1998, for defense and
other costs and settlements with litigants and claimants, the
company had accrued liabilities of $188 million.
The company has substantial primary and excess products liability
occurrence insurance coverage and claims-made products liability
insurance coverage, which it believes provide coverage for
substantially all of its current exposure for breast implant claims
and defense costs. Most insurers have alleged reservations of rights
to deny all or part of the coverage for differing reasons, including
each insurer's obligations in relation to the other insurers (i.e.
allocation) and which claims trigger both the various occurrence and
claims-made insurance policies. Some insurers have resolved and
paid, or committed to, their policy obligations. The company
believes the failure of many insurers to voluntarily perform as
promised subjects them to the company's claims for excess liability
and damages for breach of the insurers' obligation of good faith.
On September 22, 1994, three excess coverage occurrence insurers
initiated in the courts of the State of Minnesota a declaratory
judgment action against the company and numerous insurance carriers
seeking adjudication of certain coverage issues and allocation among
insurers. On December 9, 1994, the company initiated an action
against its occurrence insurers in the Texas State Court in and for
Harrison County, seeking a determination of responsibility among the
company's various occurrence insurers with applicable coverages. The
state of Texas has the most implant claims. This action has since
been removed to the U.S. District Court, Eastern District of Texas,
and stayed pending resolution of the litigation in the Minnesota
courts.
The insurers that are parties to these actions generally acknowledge
that they issued products liability insurance to the company and
that breast implant claims are products liability claims. The trial
in Minnesota to resolve the company's insurance coverage and the
financial responsibility of occurrence insurers for breast implant
claims and defense costs began on June 4, 1996, and is continuing in
phases with the next trial phase scheduled for January 4, 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
<PAGE> 26
"triggered." The court also granted the insurers' motion for
partial declaratory judgment on the question of the allocation
method to be applied in the case. In July 1997 the trial court ruled
further on the trigger issue and on the general allocation method.
That ruling was consistent with and further supported the company's
opinion as stated in the following paragraph. In November 1997,
upon reconsideration, the court reversed a portion of its July
ruling and reinstated a portion of its previous ruling. The company
believes that conflicting rulings now exist that need to be
clarified by the court and reconciled with applicable law. Motions
to clarify the allocation methodology of triggered policies under
these rulings are pending. Court options include clarification,
further trial followed by additional rulings or certification for
interlocutory (while the case is still pending) appeal.
The company believes it ultimately will prevail in this insurance
litigation. The company's belief is based on an analysis of its
insurance policies; court decisions on these and similar issues;
reimbursement by insurers for these types of claims; and
consultation with outside counsel who are experts in insurance
coverage matters. If, however, the occurrence insurers ultimately
prevail in this insurance litigation, the company could be
effectively deprived of significant and potentially material
insurance coverage for breast implant claims. (See discussion of
the accrued receivables for insurance recoveries below.)
As of September 30, 1998, the company had accrued receivables for
insurance recoveries of $772 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, (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.
<PAGE> 27
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.
<PAGE> 28
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as exhibits to this
Report.
(12) A statement regarding the calculation of the ratio of
earnings to fixed charges. Page 30.
(15) A letter from the company's independent auditors
regarding unaudited interim financial statements.
Page 31.
(27) Financial data schedule (EDGAR filing only).
(b) Reports on Form 8-K:
The company filed a report on Form 8-K dated August 27, 1998.
In a release dated August 27, 1998, the company announced that it
expects double-digit earnings growth for the coming three years and
sales to increase an average of eight percent per year. The company
also announced its plans for growth and productivity improvement.
The company stated that it anticipates a pre-tax charge of as much as
$500 million associated with actions outlined in the release. The
news release contained forward-looking statements relating to
earnings and sales growth over the next three years and other
matters. The news release was attached as Exhibit 99 to the Form 8-K.
None of the other item requirements of Part II of Form 10-Q are
applicable to the company for the quarter ended September 30, 1998.
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MINNESOTA MINING AND MANUFACTURING COMPANY
(Registrant)
Date: March 31, 1999
/s/ Ronald G. Nelson
Ronald G. Nelson,
Vice President and Controller
<PAGE> 30
<TABLE>
EXHIBIT 12
MINNESOTA MINING AND MANUFACTURING COMPANY AND SUBSIDIARIES
CALCULATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
(Unaudited)
<CAPTION>
Nine Months
Ended
September 30, Year Year Year Year Year
1998 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Income from continuing
operations before
income taxes and
minority interest* $1,555 $3,440 $2,479 $2,168 $2,011 $1,851
Add:
Interest on debt 106 94 79 102 70 39
Interest component of the
ESOP benefit expense 22 32 34 37 39 41
Portion of rent under
operating leases
representative of the
interest component 33 41 46 51 46 44
Less: Equity in undistributed
income of 20-50% owned
companies 4 3 -- 1 2 --
------ ------- ------- ------- ------- -------
TOTAL EARNINGS AVAILABLE
FOR FIXED CHARGES $1,712 $3,604 $2,638 $2,357 $2,164 $1,975
====== ====== ====== ====== ====== ======
FIXED CHARGES
Interest on debt 106 94 79 102 70 39
Interest component of the
ESOP benefit expense 22 32 34 37 39 41
Portion of rent under
operating leases
representative of the
interest component 33 41 46 51 46 44
------ ------ ------ ------ ------ ------
TOTAL FIXED CHARGES $ 161 $ 167 $ 159 $ 190 $ 155 $ 124
====== ====== ====== ====== ====== ======
RATIO OF EARNINGS TO
FIXED CHARGES 10.63 21.58 16.59 12.41 13.96 15.93
<FN>
<F1>
*1998 includes a pre-tax restructuring charge of $332 million; 1997
includes a pre-tax gain on the sale of National Advertising Company of $803
million; 1995 includes a pre-tax restructuring charge of $79 million.
</FN>
</TABLE>
<PAGE> 31
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We are aware that our report dated October 22, 1998 on our reviews of
interim condensed consolidated financial information of Minnesota
Mining and Manufacturing Company and Subsidiaries (the Company) for
the three-month and nine-month periods ended September 30, 1998 and
1997, and included in the Company's Form 10-Q for the quarter ended
September 30, 1998, is incorporated by reference in the Company's
registration statements on Form S-8 (Registration Nos. 33-14791, 33-
49842, 33-58767, 333-26957, 333-30689 and 333-30691), and Form S-3
(Registration No. 33-48089). Pursuant to Rule 436(c), under the
Securities Act of 1933, this report should not be considered a part of
the registration statements prepared or certified by us within the
meaning of Sections 7 and 11 of that Act.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Paul, Minnesota
November 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS AND NOTES.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 204
<SECURITIES> 177
<RECEIVABLES> 2,664
<ALLOWANCES> 0
<INVENTORY> 2,428
<CURRENT-ASSETS> 6,490
<PP&E> 12,995
<DEPRECIATION> 7,684
<TOTAL-ASSETS> 13,965
<CURRENT-LIABILITIES> 4,500
<BONDS> 1,426
0
0
<COMMON> 236
<OTHER-SE> 5,648
<TOTAL-LIABILITY-AND-EQUITY> 13,965
<SALES> 11,236
<TOTAL-REVENUES> 11,236
<CGS> 6,477
<TOTAL-COSTS> 6,477
<OTHER-EXPENSES> 303
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> 1,555
<INCOME-TAX> 552
<INCOME-CONTINUING> 964
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 964
<EPS-PRIMARY> 2.39
<EPS-DILUTED> 2.36
</TABLE>
