<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended June 30, 2000 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 June 30, 2000, there were 395,291,674 shares of the
Registrant's common stock outstanding.
This document contains 29 pages.
The exhibit index is set forth on page 26.
<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 Six months ended
June 30 June 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales $4,224 $3,863 $8,276 $7,639
Operating expenses
Cost of goods sold 2,379 2,188 4,645 4,350
Selling, general and
administrative expenses 1,068 975 2,089 1,940
Other income - net -- (104) (50) (104)
Total 3,447 3,059 6,684 6,186
Operating income 777 804 1,592 1,453
Other income and expense
Interest expense 26 26 52 57
Investment and other
income - net (6) (7) (12) (15)
Total 20 19 40 42
Income before income taxes
and minority interest 757 785 1,552 1,411
Provision for income taxes 265 291 547 516
Minority interest 22 18 48 35
Net income $ 470 $ 476 $ 957 $ 860
Weighted average common
shares outstanding - basic 395.6 403.2 396.6 402.8
Earnings per share - basic $ 1.19 $ 1.18 $ 2.41 $ 2.14
Weighted average common
shares outstanding - diluted 399.2 407.4 400.5 406.5
Earnings per share - diluted $ 1.18 $ 1.17 $ 2.39 $ 2.12
<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, except per-share amounts)
<CAPTION>
(Unaudited)
June 30, December 31,
2000 1999
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 420 $ 387
Other securities 16 54
Accounts receivable - net 3,009 2,778
Inventories
Finished goods 1,226 1,103
Work in process 607 544
Raw materials and supplies 419 383
Total inventories 2,252 2,030
Other current assets 1,057 817
Total current assets 6,754 6,066
Investments 559 487
Property, plant and equipment 13,646 13,379
Less accumulated depreciation (7,936) (7,723)
Property, plant and equipment - net 5,710 5,656
Other assets 1,910 1,687
Total $14,933 $13,896
Liabilities and Stockholders' Equity
Current liabilities
Short-term debt $ 1,871 $ 1,130
Accounts payable 1,078 1,008
Payroll 358 361
Income taxes 708 464
Other current liabilities 959 856
Total current liabilities 4,974 3,819
Long-term debt 1,193 1,480
Other liabilities 2,343 2,308
Stockholders' equity
Common stock, 472,016,528 shares issued,
$.01 par value ($.50 par value - 1999) 5 236
Capital in excess of par value 291 60
Retained earnings 11,173 10,741
Treasury stock, at cost (4,127) (3,833)
June 30, 2000: 76,724,854 shares
December 31, 1999: 73,305,711 shares
Unearned compensation - ESOP (314) (327)
Accumulated other comprehensive income (loss)
Cumulative translation - net (753) (694)
Minimum pension liability adjustments - net (30) (30)
Debt and equity securities, unrealized gain - net 178 136
Total accumulated other comprehensive loss (605) (588)
Stockholders' equity - net 6,423 6,289
Total $14,933 $13,896
<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 Cash Flows
(Dollars in millions)
(Unaudited)
<CAPTION>
Six months ended
June 30
2000 1999
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 957 $ 860
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 457 449
Accounts receivable (206) (176)
Inventories (155) 91
Implant litigation - net 31 57
Other - net 69 432
Net cash provided by operating activities 1,153 1,713
Cash Flows from Investing Activities
Purchases of property, plant and equipment (466) (513)
Acquisitions of businesses (297) (2)
Proceeds from sale of businesses 1 203
Other changes - net (21) (41)
Net cash used in investing activities (783) (353)
Cash Flows from Financing Activities
Change in short-term debt - net 454 (694)
Repayment of long-term debt (15) (105)
Proceeds from long-term debt 3 1
Purchases of treasury stock (498) (223)
Reissuances of treasury stock 129 200
Dividends paid to stockholders (460) (452)
Distributions to minority interests (26) (9)
Net cash used in financing activities (413) (1,282)
Effect of exchange rate changes on cash 76 (31)
Net increase in cash and cash equivalents 33 47
Cash and cash equivalents at beginning of year 387 211
Cash and cash equivalents at end of period $ 420 $ 258
<FN>
<F1>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
</FN>
</TABLE>
<PAGE> 5
Minnesota Mining and Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The interim consolidated 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 non-recurring items relating to
the termination of a product distribution agreement in the first
quarter of 2000 and gains on divestitures, net of an investment
valuation adjustment, in the second quarter of 1999. The results of
operations for any interim period are not necessarily indicative of
results for the full year. The interim consolidated financial
statements and notes are presented as permitted by the requirements
of 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 1999
Annual Report on Form 10-K.
Acquisitions:
In separate transactions during the second quarter of 2000, 3M
acquired 81 percent of Quante AG (a telecommunications company) and
100 percent of four smaller businesses for a total purchase price of
$297 million in cash plus 128,994 shares of 3M common stock. The
stock had a fair market value of $11 million and was previously held
as 3M treasury stock. All of these transactions were accounted for
using the purchase method of accounting. The preliminary estimated
fair values of assets acquired and liabilities assumed relating to
these acquisitions are summarized below:
<TABLE>
<CAPTION>
Amounts in millions - Asset (Liability):
<S> <C>
Accounts receivable $ 86
Inventories 109
Other working capital - net (95)
Property, plant and equipment 129
Purchased intangible assets 167
Other assets 29
Interest bearing debt (99)
Long-term liabilities (18)
Net assets acquired $308
</TABLE>
The purchased intangible assets, including goodwill, are being
amortized on a straight-line basis over the periods benefited,
ranging from three to twenty years. The company has made a tender
offer of about $35 million for the remaining shares outstanding of
Quante AG. Proforma information related to these acquisitions is not
included as the impact of these acquisitions on the company's results
of operations is not considered to be significant.
<PAGE> 6
Specialty Material - Perfluorooctanyl Chemistry Phase Out:
In May 2000, 3M announced its intent to substantially phase out
production by the end of 2000 of the perfluorooctanyl chemistry used
to produce certain repellents and surfactant products. These include
many Scotchgard brand products, such as soil, oil and water repellent
products; coatings used for oil and grease resistance on paper
packaging; fire-fighting foams; and specialty components for other
products. The affected product lines represent about $300 million in
annual sales with an operating income margin around 20 percent.
The company continues to analyze the expected costs in connection
with exiting these operations and has determined that no charges
should be recorded during the second quarter of 2000. As of June 30,
2000, the company did not record any severance charges as the
accounting requirements for recording severance charges had not been
met. As of June 30, 2000, the company has sufficient identifiable
cash flows to recover the carrying value of the affected equipment
and believes it is likely that such equipment has alternative future
uses. Accordingly, no impairment or accelerated depreciation expense
has been recorded. The company expects to complete final assessments
in the second half of 2000 regarding equipment and personnel.
Company Restructuring Charge:
As of December 31, 1999, the company-wide restructuring program,
initiated in the second half of 1998, was substantially complete.
This is discussed in the 1999 Form 10-K. Because certain employees
can defer receipt of termination benefits for up to 12 months, cash
payments in the first six months of 2000 relate primarily to previous
terminations. Selected information relating to the restructuring
follows.
<TABLE>
<CAPTION>
Restructuring Employee
Liability Termination
(Millions) Benefits Other Total
<S> <C> <C> <C>
December 31, 1999 liability $ 31 $ 8 $ 39
Cash payments
First quarter 2000 (18) (1) (19)
Second quarter 2000 (1) (1) (2)
June 30, 2000 liability $ 12 $ 6 $ 18
</TABLE>
Financial Instruments:
In the second quarter of 2000, the company entered into additional
forward contracts, primarily in European euros, to reduce exchange
rate risk arising from cross-border financing activities denominated
in foreign currencies. This increased the forward contracts face
amounts from $997 million at year-end 1999 to about $1.2 billion at
June 30, 2000. The amounts at risk are not material because the
company has the ability to generate offsetting foreign currency cash
flows.
<PAGE> 7
Business Segments:
In the first quarter of 2000, business segment operating income for
1999 was restated for minor amounts, to be consistent with year 2000
management reporting practices. Certain costs previously included in
Corporate and Unallocated were allocated to the individual business
segments. 3M net sales and operating income by segment for 1999 and
2000 follow.
<TABLE>
<CAPTION>
Business
Segment
Information Six Months Second Quarter First Quarter
(Millions) 2000 1999 2000 1999 2000 1999
<S> <C> <C> <C> <C> <C> <C>
Net sales
Industrial $1,784 $1,678 $ 873 $ 836 $ 911 $ 842
Transportation,
Graphics and Safety 1,784 1,583 912 806 872 777
Health Care 1,559 1,561 794 793 765 768
Consumer and Office 1,379 1,276 692 638 687 638
Electro and
Communications 1,147 927 642 485 505 442
Specialty Material 607 584 302 292 305 292
Corporate and
Unallocated 16 30 9 13 7 17
Total Company $8,276 $7,639 $4,224 $3,863 $4,052 $3,776
Operating income
Industrial $ 338 $ 302 $ 153 $ 154 $ 185 $ 148
Transportation,
Graphics and Safety 422 319 213 171 209 148
Health Care 351 338 158 194 193 144
Consumer and Office 207 183 102 95 105 88
Electro and
Communications 194 172 105 90 89 82
Specialty Material 108 115 57 60 51 55
Corporate and
Unallocated (28) 24 (11) 40 (17) (16)
Total Company $1,592 $1,453 $ 777 $ 804 $ 815 $ 649
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
Business
Segment Fourth Third Fourth Third
Information Year Quarter Quarter Year Quarter Quarter
(Millions) 1999 1999 1999 1999 1999 1999
Net sales Operating income
<S> <C> <C> <C> <C> <C> <C>
Industrial $ 3,394 $ 865 $ 851 $ 612 $ 156 $ 154
Transportation,
Graphics and Safety 3,228 819 826 675 172 184
Health Care 3,118 789 768 680 159 183
Consumer and Office 2,688 700 712 401 97 121
Electro and
Communications 2,014 553 534 402 111 119
Specialty Material 1,166 284 298 185 20 50
Corporate and
Unallocated 51 13 8 1 27 (50)
Total Company $15,659 $4,023 $3,997 $2,956 $ 742 $ 761
</TABLE>
First quarter 2000 operating income includes a $50 million benefit
relating to the termination of a product distribution agreement in
the Health Care segment. Third quarter 1999 operating income
includes a $43 million gain related to divestitures, mainly in the
Health Care area, and Corporate and Unallocated includes $73 million
in litigation expense partially offset by a $26 million change in
estimate that reduced the restructuring charge. Second quarter 1999
operating income includes gains on divestitures, net of an investment
valuation adjustment, of $30 million in Health Care and $74 million
in Corporate and Unallocated.
Accounting Pronouncements:
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition." An amendment in
June 2000 delayed the effective date until the fourth quarter of
2000. The company is reviewing the requirements of this standard and
has not yet determined the impact of this standard on its
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133, as amended, must be adopted by the company no later than
January 1, 2001. 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 finalized its determination of the impact of this
standard on its consolidated financial statements.
<PAGE> 9
Earnings Per Share:
The difference in the weighted average common shares outstanding for
calculating basic and diluted earnings per share is attributable to
the assumed exercise of the Management Stock Ownership Program (MSOP)
stock options for the three-month and six-month periods ended June
30, 2000 and 1999. Certain MSOP options outstanding were not
included in the computation of diluted earnings per share because
they would not have had a dilutive effect (about 13.5 million to 16.0
million shares for all periods presented).
Comprehensive Income:
The components of total comprehensive income are shown below. In the
second quarter of 2000 and 1999, deferred income taxes for the
unrealized gain on debt and equity securities totaled $8 million and
$23 million, respectively, and in the first six months of 2000 and
1999 totaled $25 million and $29 million, respectively.
<TABLE>
<CAPTION>
Total Comprehensive Income Three months ended Six months ended
June 30 June 30
(Millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net income $ 470 $ 476 $ 957 $ 860
Other comprehensive income (loss)
Cumulative translation - net (4) (26) (59) (210)
Debt and equity securities,
unrealized gain - net 13 37 42 48
Total comprehensive income $ 479 $ 487 $ 940 $ 698
</TABLE>
Common Stock:
At the Annual Meeting of Stockholders held on May 9, 2000, the
company's shareholders approved amendments to the company's Restated
Certificate of Incorporation (i) to increase the number of authorized
shares of common stock of the company to 1.5 billion shares and (ii)
to change the par value of the company's common stock to $.01 per
share. This change resulted in a reclassification of $231 million
from common stock to capital in excess of par value.
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 interim consolidated financial statements.
PricewaterhouseCoopers LLP, the company's independent auditors, have
performed a review of the unaudited interim consolidated financial
statements included herein, and their review report thereon
accompanies this filing.
<PAGE> 10
Review Report of Independent Auditors
To the Stockholders and Board of Directors of Minnesota Mining and
Manufacturing Company:
We have reviewed the accompanying consolidated balance sheet of
Minnesota Mining and Manufacturing Company and Subsidiaries as of
June 30, 2000, and the related consolidated statements of income for
each of the three-month and six-month periods ended June 30, 2000 and
1999, and of cash flows for the six-month periods ended June 30, 2000
and 1999. 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 auditing standards generally accepted in the United States, 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 accompanying consolidated interim
financial statements referred to above for them to be in conformity
with accounting principles generally accepted in the United States.
We previously audited, in accordance with auditing standards
generally accepted in the United States, the consolidated balance
sheet as of December 31, 1999, and the related consolidated
statements of income, of changes in stockholders' equity and
comprehensive income, and of cash flows for the year then ended (not
presented herein); and in our report dated February 14, 2000, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1999, 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
July 26, 2000
<PAGE> 11
Minnesota Mining and Manufacturing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Second Quarter
Worldwide sales for the second quarter totaled $4.224 billion, up 9.3
percent from the second quarter last year. Volume increased 12
percent. Selling prices worldwide declined about 2 percent, largely
due to reductions in 3M's electronics business, which posted strong
volume gains. Currency decreased worldwide sales by about 1 percent.
In the United States, sales totaled $1.958 billion, with volume up 7
percent on a reported basis and 8 percent excluding acquisitions and
divestitures. U.S. selling prices declined 1 percent overall.
Internationally, sales totaled $2.266 billion, up nearly 13 percent
in dollars and more than 15 percent in local currencies. Currency
reduced international sales by 2.5 percent. Negative currency
translation of 9 percent in Europe and 4 percent in Latin America
more than offset a positive 7 percent benefit in the Asia Pacific
area. The positive trend in 3M's international top-line growth was
evident in all major geographic areas.
European local currency sales increased nearly 19 percent, with about
half of this increase related to the acquisition of Quante AG, a
manufacturer of telecommunications products and systems. In the Asia
Pacific area, local currency sales increased 13 percent. In Asia
outside Japan, local currency sales increased 18 percent, led by
Korea and the China region. In Japan, local currency sales increased
11 percent. In Latin America, sales in local currencies were up
about 13 percent, with strong growth in both Brazil and Mexico. In
Canada, local currency sales increased 4 percent.
Cost of goods sold was 56.3 percent of sales, down three-tenths of a
percentage point from the second quarter last year. Gross margins
benefited from a strong performance in our factories, volume growth,
productivity gains and lower employee benefit costs, but were
penalized by higher raw material costs. Cost of goods sold includes
manufacturing; research, development, and related expenses; and
engineering expenses.
Selling, general and administrative expenses were 25.3 percent of
sales, about the same as in the second quarter of last year. These
expenses were helped by lower employee benefit costs, but also
reflected higher advertising and promotion expenses.
Other operating income in the second quarter of 1999 reflects a pre-
tax benefit of $104 million ($55 million, or 14 cents per share,
after tax) related to gains on divestitures, net of an investment
valuation adjustment.
<PAGE> 12
The following discussion excludes the impact of this second quarter
1999 non-recurring pre-tax benefit of $104 million.
Worldwide operating income was 18.4 percent of sales, up three-tenths
of a percentage point from the same period last year.
Second-quarter interest expense of $26 million was the same as in the
second quarter last year, and in line with recent quarters. Net
investment and other income was $6 million, also in line with recent
quarters.
The worldwide effective income tax rate for the quarter was 35.0
percent, down from 35.5 percent in the second quarter last year.
Minority interest was $22 million, compared with $18 million in the
second quarter of 1999. The increase reflects higher profits in
Sumitomo 3M Limited, partially offset by a decrease as a result of
3M's acquisition of the 46 percent minority interest in Dyneon in
December of 1999.
Net income for the second quarter of 2000 totaled $470 million, or
$1.18 per diluted share, compared with $421 million, or $1.03 per
diluted share, in the second quarter of 1999. The company estimates
that changes in the value of the U.S. dollar decreased earnings for
the quarter by about 2 cents per share compared with the second
quarter of 1999. 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.
First Six Months
Worldwide sales for the first six months totaled $8.276 billion, up
8.3 percent from the same period last year. Volume increased 11
percent. Selling prices worldwide declined about 2 percent, largely
due to reductions in 3M's electronics business, which posted strong
volume gains. Currency decreased worldwide sales by about 1 percent.
In the United States, sales totaled $3.850 billion, with volume up 7
percent and selling prices down 1 percent overall. Internationally,
sales totaled $4.426 billion. Volume increased 15 percent, while
selling prices were down about 2 percent, resulting in overall local-
currency sales gains of about 13 percent. Currency translation
reduced international sales by 3 percent.
Cost of goods sold was 56.2 percent of sales, down seven-tenths of a
percentage point from the same period last year. Gross margins
benefited from a strong performance in our factories, volume growth,
productivity gains and lower employee benefit costs, but were
penalized by higher raw material costs. Cost of goods sold includes
manufacturing; research, development, and related expenses; and
engineering expenses.
<PAGE> 13
Selling, general and administrative expenses were 25.2 percent of
sales, compared with 25.4 percent in the same period last year.
These expenses were helped by lower employee benefit costs, but also
reflected higher advertising and promotion expenses.
Other operating income in the first six months of 2000 reflects a pre-
tax benefit of $50 million, or 8 cents per share, associated with the
termination of a product marketing and distribution agreement in the
health care business. The first six months of 1999 reflects a pre-
tax benefit of $104 million, or 14 cents per share, relating to gains
on divestitures, net of an investment valuation adjustment. The
impact of these items on 3M's Consolidated Statement of Income
follows.
<TABLE>
Supplemental Unaudited Consolidated Statement of Income Information
(Millions, except per-share amounts)
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
Excluding Excluding
non- Non- non- Non-
recurring recurring Reported recurring recurring Reported
items items total items items total
<S> <C> <C> <C> <C> <C> <C>
Operating income $1,542 $ 50 $1,592 $1,349 $ 104 $1,453
Other expense 40 -- 40 42 -- 42
Income before
income taxes and
minority interest $1,502 $ 50 $1,552 $1,307 $ 104 $1,411
Provision for
income taxes 528 19 547 467 49 516
Effective tax rate 35.2% 38.0% 35.3% 35.7% 46.9% 36.6%
Minority interest 48 -- 48 35 -- 35
Net income $ 926 $ 31 $ 957 $ 805 $ 55 $ 860
Per share-diluted $ 2.31 $ .08 $ 2.39 $ 1.98 $ .14 $ 2.12
</TABLE>
The following discussion excludes the impact of non-recurring items.
Worldwide operating income was 18.6 percent of sales, up nine-tenths
of a percentage point from the same period last year. Volume growth
and productivity gains drove most of the improvement in worldwide
operating income. The lower employee benefit costs discussed
previously is the result of lower pension expense, primarily in the
United States. This five-tenths of a percentage point improvement is
more than offset by higher payroll costs and other inflationary impacts.
The first six months interest expense of $52 million was down $5
million from the same period last year. Net investment and other
income was $12 million, compared with $15 million in the first six
months of 1999.
The worldwide effective income tax rate for the first six months was
35.2 percent, down from 35.7 percent in the same period last year.
<PAGE> 14
Minority interest was $48 million, compared with $35 million in the
same period of 1999. The increase reflects higher profits in Sumitomo
3M Limited, partially offset by a decrease as a result of 3M's
acquisition of the 46 percent minority interest in Dyneon in December
of 1999.
Net income for the first six months of 2000 totaled $926 million, or
$2.31 per diluted share, compared with $805 million, or $1.98 per
diluted share, in the same period of 1999. The company estimates
that changes in the value of the U.S. dollar decreased earnings for
the first six months of 2000 by about 6 cents per share compared with
the same period of 1999. 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.
Performance by Business Segment
The following is a discussion of the global operating results of the
company's six business segments. The discussion applies to both
second quarter and first six month results unless otherwise
indicated.
In Industrial Markets, sales for the second quarter increased 5
percent in dollars and 6 percent in local currencies, and for the
first six months sales increased 6 percent in dollars and 8 percent
in local currencies. Leading growth in this market was the
Superabrasives and Microfinishing Systems business, which is growing
through strong demand for proprietary 3M abrasives used in the
electronics and telecommunications industries. Industrial Markets
also saw good demand for high-performance tapes and abrasives.
Profits of this market were basically unchanged in the second quarter
of 2000 when compared to the same period last year, with the increase
in sales offset largely by inflationary and spending increases.
First six months operating income was up about 12 percent, driven by
volume gains, increased manufacturing efficiencies, and other cost
improvements.
In the Transportation, Graphics and Safety segment, sales for the
second quarter and first six months rose 13 percent both in dollars
and in local currencies. Optical Systems continued to show
outstanding growth, providing optical films for computer monitors,
electronic organizers, cell phones and other devices with electronic
displays. At the end of second quarter, 3M acquired a manufacturer
of touch screens and related products, which adds product offerings
to the Optical Systems business. The occupational health and safety,
automotive, and safety and security businesses also turned in good
worldwide sales growth. Profits increased 25 percent from the
comparable quarter and 32 percent for the first six months, led by
double-digit sales growth and productivity gains.
In the Health Care segment, sales for the second quarter and first
six months were basically flat in dollars and up about 2.5 percent in
local currencies. Excluding divestitures, local-currency health care
sales increased about 7 percent. The pharmaceuticals, skin health,
health information systems and dental businesses all posted good
sales gains.
<PAGE> 15
Non-recurring items in Health Care in the first quarter of 2000
include a $50 million gain associated with the termination of a
product distribution agreement and in the second quarter of 1999
include gains on divestitures of $30 million. Excluding non-
recurring items, operating income in the second quarter and first six
months was relatively flat, with the comparison impacted by
divestitures made in 1999 and inflationary and spending increases in
2000.
In the Consumer and Office segment, sales for the second quarter and
first six months increased about 8 percent in dollars and about 10
percent in local currencies. The office supply, home care and do-it-
yourself businesses drove higher revenues. Profits rose 7 percent in
the second quarter and 13 percent for the first six months, mainly
due to solid volume gains, partially offset by higher advertising and
promotion expenses.
In the Electro and Communications segment, revenues for the second
quarter increased 32 percent in dollars. Excluding acquisitions,
revenues for the second quarter and first six months increased 15
percent. In the second quarter of 2000, 3M acquired 81 percent of
the total shares outstanding of Quante AG, a German
telecommunications company. Sales of Quante AG in 1999 were
approximately $350 million. This market continued to see strong
growth in Microflex circuits, connectors, telecom, and electronic
handling and protection products. Profits of this market increased
about 16 percent in the second quarter and 13 percent for the first
six months. Profits grew more slowly than sales due to volume-
related price decreases in certain 3M electronic products and costs
associated with the Quante AG acquisition.
In the Specialty Material Markets segment, sales for the second
quarter increased more than 3 percent in dollars and about 5 percent
in local currencies, and for the first six months sales increased 4
percent in dollars and about 6 percent in local currencies. Growth
was led by performance materials, particularly in electronics-related
applications and by 3M's roofing granules business. 3M acquired the
46 percent minority interest in Dyneon at the end of 1999. In the
year 2000, the purchase method of accounting resulted in the
amortization of intangibles and higher depreciation of fixed assets
within operating income. On a proforma basis, assuming this
acquisition had occurred at the beginning of 1999, this market would
show an operating income increase of about 2 percent for both the
second quarter and first six months. Also, in 2000, the 46 percent
minority interest profit remains with 3M and is not eliminated,
resulting in an average quarterly 2000 benefit to the company of $7
million that is not reflected in reported market operating income. In
May 2000, 3M announced its intent to substantially phase out
production by the end of 2000 of the perfluorooctanyl chemistry used
to produce certain repellents and surfactant products. The affected
product lines represent about $300 million in annual sales with an
operating income margin around 20 percent.
<PAGE> 16
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity remain strong.
Working capital totaled $1.780 billion at June 30, 2000, compared
with $2.247 billion at year-end 1999. The company's current ratio
was 1.4, down from 1.6 at year-end. Working capital and the current
ratio were both impacted by higher short-term debt at June 30, 2000,
largely relating to new acquisitions, compared with a lower short-
term debt balance at December 31, 1999, helped by divestiture income
received in 1999. The accounts receivable average days' sales
outstanding was 59 days, down from 61 days at year-end, but the same
as June 30, 1999. The company's inventory index, which represents the
average number of months of inventory on-hand, was 3.3 months, up
slightly from 3.1 months at year-end.
Total debt increased $454 million from year-end 1999 to $3.064
billion. As of June 30, 2000, total debt was 32 percent of total
capital. The company's strong credit rating provides ready and ample
access to funds in global capital markets. At June 30, 2000, the
company had available short-term lines of credit totaling about $703
million.
Net cash provided by operating activities totaled $1.153 billion in
the first six months of the year, down $560 million from the same
period last year. In 2000, accounts receivable and inventory dollars
increased, primarily due to solid sales growth. In 1999, the company
had benefits in working capital and other areas. Net cash inflows
from mammary implant litigation were $31 million in the first six
months of 2000, compared with $57 million in net cash inflows in the
same period last year.
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.
Cash used in investing activities totaled $783 million in the first
six months of the year, compared with $353 million in the same period
last year. Capital expenditures for the first six months of 2000 were
$466 million, a decrease of about 9 percent from the same period last
year. Proceeds from sales of businesses in 1999 totaling $203 million
related to divestitures of Eastern Heights Bank and the
Cardiovascular Systems business. In the third quarter of 2000, the
company sold an available-for-sale marketable security investment
with net cash proceeds of $86 million.
In the second quarter of 2000, in separate transactions, 3M acquired
81 percent of Quante AG and 100 percent of four smaller businesses
for a total purchase price of $297 million in cash plus 128,994
shares of 3M common stock. Refer to "Acquisitions" in the Notes to
Consolidated Financial Statements for details concerning these
acquisitions. The company expects to complete some additional
acquisitions in the second half of 2000, although no estimate can
currently be made of the number of such acquisitions or the amounts
involved.
<PAGE> 17
Treasury stock repurchases for the first six months of 2000 were $498
million, compared with $223 million in the same period last year.
Financing activities in the first six months of 2000 for both short-
term and long-term debt included net cash inflows of $442 million,
compared with net cash outflows of $798 million in the same period
last year.
The company repurchased about 5.7 million shares of common stock in
the first six months of 2000, compared with about 2.6 million shares
in the same period last year. In November 1999, the Board of
Directors authorized the repurchase of up to 12 million shares of 3M
common stock through December 31, 2000. As of June 30, 2000, 6.3
million shares remained authorized for repurchase. Stock repurchases
are made to support employee stock purchase plans and for other
corporate purposes, including acquisitions.
Cash dividends paid to shareholders totaled $460 million in the first
six months of this year, compared with $452 million in the same
period last year. In February 2000, the quarterly dividend was
increased to 58 cents per share.
Legal proceedings are discussed in the Legal Proceedings section in
Part II, Item 1, of this Form 10-Q.
FUTURE OUTLOOK
The company is not able to project what the consequences will be from
the dynamic economies around the world. The company is monitoring
business conditions closely and is prepared to make adjustments in
costs, pricing and investments as appropriate.
For the next six months, the company expects to increase sales in
local currencies, including the Quante AG acquisition, about 10
percent. Currency, at June 30, 2000, rates, is expected to reduce
year 2000 sales by about 1.5 percent worldwide.
The company expects continued solid earnings growth in the remaining
six months of 2000. The company estimates, based on currency rates as
of June 30, 2000, that currency would reduce earnings for the year by
about 13 cents per share, primarily due to a weaker-than-anticipated
Euro. The company expects raw material costs to increase about 2
percent for the year 2000. Despite these challenges, the company
believes it will deliver solid results, helped by strong volume gains
and continued good productivity.
ACCOUNTING PRONOUNCEMENTS
Refer to "Accounting Pronouncements" in the Notes to Consolidated
Financial Statements for a discussion of accounting pronouncements to
be adopted in the future which could affect the company's current
financial reporting practices.
<PAGE> 18
YEAR 2000 UPDATE
As of the date of this filing, the company has not experienced any
material Year 2000 problems with its IT or non-IT systems or
products, nor has the company experienced any material problems with
any of its key customers or suppliers. Refer to the 1999 Form 10-K
for a complete discussion of the Year 2000 issue.
THE EURO CONVERSION
There have not been any significant new developments relating to the
Euro Conversion since year-end 1999. Refer to the 1999 Form 10-K for
a complete discussion of the Euro Conversion.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements may be identified by their use
of words like "plans," "expect," "aim," "believe," "projects,"
"anticipate," "intend," "estimate," "will," "should," "could" and other
expressions that indicate future events and trends. All statements that
address expectations or projections about the future, including statements
about the company's strategy for growth, product development, market
position, expenditures and financial results are forward-looking
statements.
Forward-looking statements are based on certain assumptions and
expectations of future events that are subject to risks and
uncertainties. Actual future results and trends may differ materially
from historical results or those projected in any such forward-
looking statements depending on a variety of factors, including but
not limited to the following:
* The effects of, and changes in, worldwide economic conditions -
The company operates in more than 60 countries and derives
approximately 52 percent of its revenues from sales outside the
United States. 3M's business may be affected by factors in other
countries that are outside its control, such as downturns in economic
activity in a specific country or region, the economic difficulties
that occurred in Asia in 1998 as an example; social, political or
labor conditions in a specific country or region; or potential
adverse foreign tax consequences.
* Foreign currency exchange rates and fluctuations in those rates
- Because 3M derives more than half its revenues from sales outside
the United States, its ability to realize projected growth rates in
sales and net earnings and results of operations could be adversely
affected if the United States dollar strengthens significantly
against foreign currencies.
<PAGE> 19
* The timing and market acceptance of 3M's new product offerings -
3M's growth objectives are largely dependent on its ability to renew
its pipeline of new products and to bring those products to market.
This ability may be adversely affected by difficulties or delays in
product development, such as the inability to: identify viable new
products; successfully complete clinical trials and obtain regulatory
approvals; obtain adequate intellectual property protection; or gain
market acceptance of new products.
* Raw materials, including shortages and increases in the costs of
key raw materials.
* Acquisitions, divestitures and strategic alliances - As part of
3M's strategy for growth, the company has made and may continue to
make acquisitions, divestitures and strategic alliances. However,
there can be no assurance that these will be completed or beneficial
to the company.
* Legal proceedings (see discussion of Legal Proceedings in Part
II, Item 1 of this Form 10-Q).
<PAGE> 20
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, 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, annual results of operations,
or cash flows of the company. (NOTE: The preceding sentence applies
to all legal proceedings involving the company except the breast
implant litigation and environmental matters, which are discussed
separately in the next sections).
Breast Implant Litigation
As previously reported in the company's Annual Report on Form 10-K
for the year ended December 31, 1999, the company and certain other
companies have been named as a defendant in a number of claims and
lawsuits alleging damages for personal injuries of various types
resulting from breast implants formerly manufactured by the company
or a related company. 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> 21
As of June 30, 2000, the company had been named as a defendant, often
with multiple co-defendants, in 2,102 lawsuits and 47 claims in
various courts, all seeking damages for personal injuries from
allegedly defective breast implants. These lawsuits and claims
purport to represent 7,648 individual claimants. It is not yet
certain how many of these lawsuits and claims involve (i) products
manufactured and sold by the company, as opposed to other
manufacturers, or (ii) individuals who accepted benefits under the
Revised Settlement Program (as defined later). The company has
confirmed that 132 of the 7,648 individual claimants have opted out
of the class action and have 3M Implants. The company believes that
most of these lawsuits and claims will be dismissed either because
the claimants did not have 3M Implants or the claimants accepted
benefits under the Revised Settlement Program. The company continues
to work to clarify the status of these lawsuits and claims.
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 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 product liability actions.
The company believes that approximately 90 percent 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 June 30, 2000, the company has paid $294 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.
Under the Revised Settlement Program, additional opt outs are
expected to be minimal since the opt-out deadline has passed for
virtually all U.S. class members. The company's remaining obligations
under the Revised Settlement Program are limited since (i) most
payments to Current Claimants have already been made, (ii) no
additional Current Claims may be filed without court approval, and
(iii) Late Registrants are limited by the terms of the Revised
Settlement Program.
The company's current best estimate of the 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
is $1.2 billion. After subtracting payments of $1.152 billion as of
June 30, 2000, for defense and other costs and settlements with
litigants and claimants, the company had accrued liabilities of $48
million.
<PAGE> 22
As previously reported in the company's Annual Report on Form 10-K
for the year ended December 31, 1999, the company's insurers
initiated a declaratory judgment action in Ramsey County Minnesota
against the company seeking adjudication of certain coverage and
allocation issues. The jury trial finished on February 24, 2000. The
jury returned a verdict favorable to the company by rejecting all of
the insurers' remaining defenses to coverage for breast implant
liabilities and costs. The court will consider additional remedies
requested by the company and the insurers including eliminating,
limiting or extending allocation among the insurers providing
occurrence-based coverage (before 1986), pre- and post-judgment
interest, attorneys' fees and further equitable relief. The company
expects the court's findings and final judgment in the third quarter
of 2000.
As of June 30, 2000, the company had receivables for insurance
recoveries of $554 million, representing settled but yet to be
received amounts as well as amounts contested by the insurance
carriers. During the second quarter of 2000, the company received
payments from several of these occurrence 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 recorded 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.
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
<PAGE> 23
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,
annual results of operations, or cash flows of the company.
Environmental Matters
The company's operations are subject to environmental laws and
regulations enforceable by foreign, federal, state, local authorities
and private parties in the United States and abroad, including those
pertaining to air emissions, wastewater discharges, toxic substances,
and the handling and disposal of solid and hazardous wastes. These
laws and regulations provide under certain circumstances for the
remediation of contamination, as well as personal injury and property
damage claims. The company has incurred, and will continue to incur,
costs and capital expenditures in complying with these laws and
regulations, defending potential personal injury and property damage
claims, and modifying its business operations in light of its
environmental responsibilities. In its effort to carry out its
environmental responsibilities and comply with environmental laws and
regulations, the company has established, and periodically updates,
policies relating to environmental standards of performance for its
operations worldwide.
Under certain environmental laws, including the United States
Comprehensive Environmental Response, Compensation and Liability Act
of 1980 and similar state laws, the company may be jointly and
severally liable for the costs of environmental contamination at
current or former facilities and at off-site locations at which the
company has disposed of hazardous waste. The company has identified
numerous locations, most of which are in the United States, at which
it may have some liability for remediating contamination. Amounts
expensed for environmental remediation activities are not expected to
be material for the year 2000 at these locations. Liabilities for
estimated costs of environmental remediation are, depending on the
site, based primarily upon internal or third-party environmental
studies, and estimates as to the number, participation level and
financial viability of any other potentially responsible parties, the
extent of the contamination and the nature of required remedial
actions. Recorded liabilities are adjusted as further information
develops or circumstances change. The amounts provided in the
company's consolidated financial statements for environmental
liabilities are the gross amount of such liabilities, without
deductions for insurance or third party indemnity claims. The company
expects that the amounts accrued will be paid out over the periods of
remediation for the applicable sites, currently ranging from
approximately 5 to 30 years.
<PAGE> 24
It is often difficult to estimate the cost of environmental
compliance and remediation and potential claims given the
uncertainties regarding the interpretation and enforcement of
applicable environmental laws and regulations, the extent of
environmental contamination and the existence of alternate cleanup
methods. The company records an environmental liability when it is
probable that a liability has been incurred by the company and the
amount of the liability can be reasonably estimated. Where no amount
within a range of estimates is more likely, the minimum is recorded.
Otherwise, the most likely cost to be incurred is recorded.
The company's current assessment of the probable liabilities and
associated expenses related to environmental matters is based on the
facts and circumstances known at this time. New developments may
occur that could affect the company's assessment. These developments
include, but are not limited to, (i) changes in the information
available regarding the environmental impact of the company's
operations and products; (ii) changes in environmental regulations or
enforcement policies; (iii) new and evolving analytical and
remediation techniques; (iv) success in allocating liability to other
potentially responsible parties; and (v) financial viability of other
potentially responsible parties and third-party indemnitors.
Although the company believes that the amounts accrued for current
environmental liabilities are adequate, given the uncertainties
involved in environmental matters, it is possible that the amount of
capital expenditures and other costs which will be required may
exceed the amounts accrued for environmental liabilities and the
difference could have a material adverse effect on the consolidated
financial position, annual results of operations, or cash flows of
the company.
<PAGE> 25
Item 4. Submission of Matters to a Vote of Security Holders
(a) The registrant held its Annual Meeting of Stockholders on May
9, 2000.
(b) Proxies for the meeting were solicited pursuant to Regulation
14; there was no solicitation in opposition to management's nominees
as listed in the Proxy Statement and all such nominees were elected.
Four directors were elected to the year 2003 Class (Linda G.
Alvarado, Ronald O. Baukol, Edward M. Liddy and Aulana L. Peters).
Directors whose terms continue after the meeting were Edward A.
Brennan, Livio D. DeSimone, Rozanne L. Ridgway, Frank Shrontz, F.
Alan Smith and Louis W. Sullivan.
(c) The ratification of the appointment of PricewaterhouseCoopers
LLP, independent auditors, to audit 3M's books and accounts for the
year 2000.
<TABLE>
<CAPTION>
<S> <C>
For 324,832,451
Against 912,095
Abstain 2,172,159
</TABLE>
(d) Amendment to the Restated Certificate of Incorporation to
increase the authorized common stock.
<TABLE>
<CAPTION>
<S> <C>
For 300,848,587
Against 22,758,040
Abstain 4,310,078
</TABLE>
(e) Amendment to the Restated Certificate of Incorporation to
change par value.
<TABLE>
<CAPTION>
<S> <C>
For 320,791,755
Against 4,109,447
Abstain 3,015,503
</TABLE>
<PAGE> 26
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as exhibits to this Report.
(12) A statement setting forth the calculation of the
ratio of earnings to fixed charges. Page 28.
(15) A letter from the company's independent auditors
regarding unaudited interim consolidated
financial statements. Page 29.
(27) Financial data schedule (EDGAR filing only).
(b) The company filed a report on Form 8-K dated May 16, 2000.
An exhibit was attached to this Form 8-K that contains the
press release regarding 3M phasing out some of the chemistry
used to produce certain repellents and surfactant products.
The company filed a report on Form 8-K dated July 27, 2000.
An exhibit was attached to this Form 8-K that contains the
press release reporting 3M's financial results for the second
quarter of 2000.
The company filed a report on Form 8-K dated July 27, 2000.
An exhibit was attached reflecting amendments to the
Certificate of Incorporation approved by the stockholders
at the Annual Meeting held on May 13, 2000.
None of the other item requirements of Part II of Form 10-Q are
applicable to the company for the quarter ended June 30, 2000.
<PAGE> 27
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: August 3, 2000
/s/ Robert J. Burgstahler
Robert J. Burgstahler, Vice President and
Chief Financial Officer
(Mr. Burgstahler is the Principal Financial
and Accounting Officer and has been duly
authorized to sign on behalf of the
registrant.)
