1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2001
Commission file number 1-3285
MINNESOTA MINING AND MANUFACTURING COMPANY
State of Incorporation: Delaware
I.R.S. Employer Identification No. 41-0417775
Executive offices: 3M Center, St. Paul, Minnesota 55144
Telephone number: (651) 733-1110
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
Common Stock, Par Value $.01 Per Share New York Stock Exchange
Pacific Exchange
Chicago Stock Exchange
Note: The common stock of the registrant is also traded on the
Swiss stock exchange.
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant, based on the closing price of $111.00 per share as reported on
the New York Stock Exchange-Composite Index on January 31, 2002,
was $43.3 billion.
Shares of common stock outstanding at January 31, 2002: 390,162,665.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the company's definitive proxy statement for its annual meeting
to be held on May 14, 2002, are incorporated by reference in this Form 10-K
in response to Part III, Items 10, 11, 12 and 13.
This document contains 76 pages.
The exhibit index is set forth on page 65.
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MINNESOTA MINING AND MANUFACTURING COMPANY
FORM 10-K
For the Year Ended December 31, 2001
PART I
Item 1. Business.
Minnesota Mining and Manufacturing Company was incorporated in 1929 under the
laws of the State of Delaware to continue operations, begun in 1902, of a
Minnesota corporation of the same name. As used herein, the term "3M" or
"company" includes Minnesota Mining and Manufacturing Company and subsidiaries
unless the context otherwise indicates.
General
3M is an integrated enterprise characterized by substantial intercompany
cooperation in research, manufacturing and marketing of products. 3M's
business has developed from its research and technology in coating and bonding
for coated abrasives, the company's original product. Coating and bonding is
the process of applying one material to another, such as abrasive granules to
paper or cloth (coated abrasives), adhesives to a backing (pressure-sensitive
tapes), ceramic coating to granular mineral (roofing granules), glass beads to
plastic backing (reflective sheeting), and low-tack adhesives to paper
(repositionable notes).
3M is among the leading manufacturers of products for many of the markets it
serves. In all cases, 3M products are subject to direct or indirect
competition. Most 3M products involve expertise in product development,
manufacturing and marketing, and are subject to competition from products
manufactured and sold by other technically oriented companies.
At December 31, 2001, the company employed 71,669 people.
Business Segments
Financial information and other disclosures relating to 3M's business segments
and operations in various geographic areas are provided in the Notes to
Consolidated Financial Statements. 3M's six operating segments bring together
common or related 3M technologies, enhancing the development of innovative
products and services and providing for efficient sharing of business
resources. These segments have worldwide responsibility for virtually all 3M
product lines. Certain small businesses and staff-sponsored products, as well
as various corporate assets and unallocated corporate expenses, are not
assigned to the operating segments.
Industrial Markets: Industrial products include a wide variety of coated and
nonwoven abrasives, adhesives, pressure-sensitive tapes, and specialty
products. Industry-specialized organizations include distribution and key
account management, converter channels, automotive aftermarkets, commercial
vehicles, electronics, aerospace, marine and recreational vehicles.
Major product lines include vinyl, polyester, foil and specialty industrial
tapes and adhesives; Scotch brand masking, filament and packaging tapes;
packaging equipment; 3M brand VHB brand bonding tapes; conductive, low surface
energy, hot melt, spray and structural adhesives; reclosable fasteners; label
materials for durable goods; coated, nonwoven and microstructured surface
finishing and grinding abrasives; and products for maintaining and repairing
vehicles, boats, airplanes and other vehicles.
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Transportation, Graphics and Safety Markets: This segment provides reflective
sheeting, high-performance graphics, respirators, automotive components,
security products and optical films.
In transportation safety, 3M provides reflective sheetings used on highway
signs, vehicle license plates, construction workzone devices, trucks and other
vehicles. Major commercial graphic products include equipment, films, inks and
related products used to produce graphics for vehicles and signs. The company
also sells maintenance-free and reusable respirators. Major automotive
products include body side-molding and trim; functional and decorative
graphics; corrosion-resistant and abrasion-resistant films; tapes for
attaching nameplates, trim and moldings; and fasteners for attaching interior
panels and carpeting. Safety and security products include reflective
materials that are widely used on apparel, footwear and accessories, enhancing
visibility in low-light situations. Optical products include brightness
enhancement films for electronic displays. Other products include spill-
control sorbents, Thinsulate brand and Lite Loft brand insulations, traffic
control devices, electronic surveillance products, and films that protect
against counterfeiting. In 2000 and early 2001, 3M acquired two touch screen
companies, which added product offerings to the Optical Systems business.
Health Care Markets: Major product categories include medical and surgical
supplies, infection prevention, microbiology, health information systems,
pharmaceuticals, drug delivery systems, dental and orthodontic products, and
mechanical and tape closures for disposable diapers.
In medical and surgical, 3M is a supplier of medical tapes, dressings and
wound closures. In infection prevention, 3M markets a variety of surgical
drapes, masks and preps, as well as sterilization assurance equipment. 3M also
provides microbiology products, which make it faster and easier for food
processors to test for microbiological quality of food. In health information
systems, 3M develops and markets computer software for hospital coding and
data classification, as well as related consulting services. The health care
segment also provides other medical products, including orthopedic casting
materials, electrodes and stethoscopes.
This segment also serves the pharmaceutical and dental markets, as well as
manufacturers of disposable diapers. Pharmaceutical products include immune
response modifiers, and respiratory and women's health products. Other
products include drug-delivery systems, such as metered-dose inhalers,
transdermal skin patches and related components. Dental products include
restoratives, adhesives, finishing and polishing products, crowns, impression
material, preventive sealants, professional tooth whiteners, prophylaxis and
orthodontic appliances. Other products include tape closures for disposable
diapers, and reclosable fastening systems and other diaper components that
help diapers fit better. In early 2001, 3M combined its German dental
business with ESPE Dental AG, a leading German supplier of crowns, bridges and
other dental products. In the second quarter of 1999, the company sold the
assets of its cardiovascular systems business.
Consumer and Office Markets: Major consumer and office products include Scotch
brand tapes; Post-it brand Note products, such as flags, memo pads, labels,
Pop-up notes and dispensers; home care products, including Scotch-Brite brand
Scouring, Sponge and High Performance Products, O-Cel-O brand Sponges and
Scotchgard brand Fabric Protectors; energy control products; nonwoven abrasive
materials for floor maintenance and commercial cleaning; floor matting; and
home improvement products, including surface-preparation and wood-finishing
materials, and Filtrete brand Filters for furnaces and air conditioners.
Visual communication products serve the world's office and education markets
with overhead projectors and transparency films, plus equipment and materials
for electronic and multimedia presentations.
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Electro and Communications Markets: This segment serves the electronics,
telecommunications and electrical markets. Major electronic and electrical
products include packaging and interconnection devices; insulating materials,
including pressure-sensitive tapes and resins; and related items. These
products are used extensively by manufacturers of electronic and electrical
equipment, as well as in the construction and maintenance segments of the
electric utility, telecommunications and other industries. 3M brand Microflex
brand Circuits utilize electronic packaging and interconnection technology,
providing more connections in less space, and are used in inkjet print
cartridges, cell phones and other electronic devices. This segment serves the
world's telecommunications companies with a wide array of products for fiber-
optic and copper-based telecommunications systems. These include many
innovative connecting, closure and splicing systems; maintenance products; and
test equipment. In 2000, 3M acquired 91 percent (subsequently increased to 93
percent) of Quante AG, a telecommunications supplier, with annual sales of
approximately $350 million. In the fourth quarter of 2000, 3M also acquired
the multi-layer integrated circuit packaging line of W.L. Gore and Associates,
and in early 2001 completed the acquisition of Robinson Nugent, Inc., a
manufacturer of electronic interconnects.
Specialty Material Markets: Major specialty materials include protective
materials for furniture and fabrics; firefighting agents; fluoroelastomers for
seals, tubes and gaskets in engines; engineering fluids; and high-performance
fluids used in the manufacture of computer chips, and for electronic cooling
and lubricating of computer hard disk drives. Other products include natural
and color-coated mineral granules for asphalt shingles. In December 1999, 3M
finalized the acquisition of the outstanding minority interest in Dyneon LLC.
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 products previously
sold under the Scotchgard brand, such as soil, oil and water repellent
products for carpet, upholstery and fabrics; coatings used for oil and grease
resistance on paper packaging; fire-fighting foams; and specialty components
for other products. The company has introduced alternatives for some
applications and industry segments, including carpet protection.
Distribution
3M products are sold through numerous distribution channels. Products are sold
directly to users and through numerous wholesalers, retailers, jobbers,
distributors and dealers in a wide variety of trades in many countries around
the world. Management believes that the confidence of wholesalers, retailers,
jobbers, distributors and dealers in 3M and its products, developed through
long association with skilled marketing and sales representatives, has
contributed significantly to 3M's position in the marketplace and to its
growth. 3M has 211 sales offices worldwide, including nine major branch
offices located in principal cities throughout the United States. 3M operates
18 sales offices in the United States. Internationally, 3M has 193 sales
offices.
Research, Patents and Raw Materials
Research and product development constitute an important part of 3M's
activities. Products resulting from research and development have been a major
driver of 3M's growth. Research, development and related expenses totaled
$1.084 billion, $1.101 billion and $1.056 billion in 2001, 2000 and 1999,
respectively. Research and development, covering basic scientific research and
the application of scientific advances to the development of new and improved
products and their uses, totaled $745 million, $727 million and $688 million
in 2001, 2000 and 1999, respectively. Related expenses primarily include
technical support provided by the laboratories for existing products.
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Corporate research laboratories support research efforts of division and
market laboratories. These corporate laboratories also engage in research not
directly related to existing 3M product lines. Most major operating divisions
have their own laboratories to improve existing products and develop new
products. Research staff groups provide specialized services in
instrumentation, engineering and process development. 3M also maintains an
organization for technological development not sponsored by other units of the
company.
3M is the owner of many domestic and foreign patents derived primarily from
its research activities. 3M's business as a whole is not materially dependent
upon any one patent, license or trade secret, or upon any group of related
patents, licenses or trade secrets.
The company experienced no significant or unusual problems in the purchase of
raw materials during 2001. It is impossible to predict future shortages of
raw materials or the impact any such shortages would have.
Executive Officers
Following is a list of the executive officers of 3M, their ages, present
positions, the years elected to their present positions and other positions
held during the past five years. No family relationships exist among any of
the executive officers named, nor is there any arrangement or understanding
pursuant to which any person was selected as an officer.
Year Elected
to Present
Name Age Present Position Position Other Positions Held During 1997-2002
W. James McNerney, Jr. 52 Chairman of the Board 2001 President and CEO, General Electric
and Chief Executive Officer Aircraft Engines, Cincinnati, Ohio,
1997-2000
President and CEO, General Electric
Lighting, Cleveland, Ohio, 1995-1997
Ronald R. Belschner 62 Vice President, 2000 Division Vice President, Industrial
Engineering, Manufacturing Tape and Specialties Division,
and Logistics 1995-2000
John W. Benson 57 Executive Vice President, 1998 Group Vice President, Industrial
Health Care Markets Markets Group, 1996-1997
Robert J. Burgstahler 57 Senior Vice President, 2002 Vice President, Finance and
Business Development and Administrative Services, 2000-2002
Corporate Services President and General Manager
3M Canada, 1998-2000
Staff Vice President, Taxes, 1995-1998
Patrick D. Campbell 49 Senior Vice President 2002 Vice President, Finance, General
and Chief Financial Motors Europe, Zurich, Switzerland,
Officer 2001-2002
Executive Director, Investor Relations
and Worldwide Benchmarking, General
Motors, Detroit, Michigan,
2000-2001
Chief Financial Officer, General
Motors International, Zurich,
Switzerland, 1994-1999
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Executive Officers (continued)
Year Elected
to Present
Name Age Present Position Position Other Positions Held During 1997-2002
Joseph A. Giordano 53 Executive Vice President, 2002 Vice President, Europe and Middle
International Operations East, 2001
Vice President, Asia Pacific,
1999-2001
Regional Vice President, South and
Southeast Asia, 1999
Division Vice President, Electronic
Products Division, 1995-1998
M. Kay Grenz 55 Vice President, 1998 Staff Vice President, Human Resources
Human Resources Consulting and Resource Services,
1996-1998
Paul F. Guehler 63 Vice President, 2000 Vice President, Corporate Enterprise
Research and Development Development and Optical Technologies,
1999-2000
Optical Markets and Technologies Vice
President, 1998-1999
Division Vice President, Safety and
Security Systems Division, 1992-1998
Moe S. Nozari 59 Executive Vice President, 1999 Group Vice President, Consumer and
Consumer and Office Markets Office Markets Group, 1996-1999
Frederick J. Palensky 52 Executive Vice President, 2001 Vice President and General Manager
Specialty Material Markets 3M ESPE, 2001
and Corporate Services Division Vice President, Dental
Products Division, 1997-2001
Division Vice President, Medical
Products Technology Division,
1994-1997
David W. Powell 60 Vice President, Marketing 1999 Division Vice President, Stationery
and Office Supplies Division,
1996-1999
Charles Reich 59 Executive Vice President, 2001 Executive Vice President, Specialty
Electro and Communications Material Markets and Corporate Services,
Markets and Corporate 1999-2001
Services Group Vice President, Specialty Material
Markets Group, 1999
Group Vice President, Chemical Markets
Group, 1998
Division Vice President, Occupational
Health and Environmental Safety
Division, 1997-1998
Division Vice President, Dental Products
Division, 1990-1997
John J. Ursu 62 Senior Vice President, 1997
Legal Affairs and
General Counsel
Ronald A. Weber 60 Executive Vice President, 2000 Division Vice President, Automotive
Transportation, Graphics Division, 1996-2000
and Safety Markets
Harold J. Wiens 55 Executive Vice President, 1999 Executive Vice President, Industrial
Industrial Markets and Electro Markets, 1999
Executive Vice President, Industrial
and Consumer Markets, 1998-1999
Executive Vice President, Sumitomo
3M Limited, 1995-1997
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Item 2. Properties.
3M's general offices, corporate research laboratories, and certain division
laboratories are located in St. Paul, Minnesota. In the United States, 3M has
18 sales offices in 14 states and operates 59 manufacturing facilities in 22
states. Internationally, 3M has 193 sales offices. The company operates 89
manufacturing and converting facilities in 37 countries outside the United
States.
3M owns substantially all of its physical properties. 3M's physical
facilities are highly suitable for the purposes for which they were designed.
Properties are often used by multiple business segments since 3M is an
integrated enterprise characterized by substantial intersegment cooperation
with allocations resulting from the shared utilization of assets.
Item 3. Legal Proceedings.
General
The company and some 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 recorded 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.
While the company believes that the ultimate outcome of all of its proceedings
and claims, individually and in the aggregate, will not have a material
adverse effect on its consolidated financial position, results of operations,
or cash flows, there can be no certainty that the company may not ultimately
incur charges, whether for breast implant litigation, respirator/mask/asbestos
litigation, environmental matters or other actions, in excess of presently
recorded liabilities.
The company cannot always definitively determine possible liabilities that
exceed recorded amounts related to its legal proceedings and claims. However,
the company believes it unlikely, based upon the nature of its legal
proceedings and claims and its current knowledge of relevant facts and
circumstances, that the possible liabilities exceeding recorded amounts would
be material to its consolidated financial position, results of operations or
cash flows. With respect to products liability claims, such a conclusion about
possible liabilities considers insurance coverage available for such
liabilities.
While the company believes that a material adverse impact on its consolidated
financial position, results of operations or cash flows from any such future
charges is unlikely, given the inherent uncertainty of litigation, a remote
possibility exists that a future adverse ruling or unfavorable development
could result in future charges that could have a material adverse impact on
the company. The current estimates of the potential impact on the company's
consolidated financial position, results of operations and cash flows for its
legal proceedings and claims could change in the future.
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Breast Implant Litigation
The company and certain other companies have been named as defendants 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.
As of December 31, 2001, the company is named as a defendant, often with
multiple co-defendants, in 302 lawsuits in various courts and 5 claims, all
seeking damages for personal injuries from allegedly defective breast
implants. These lawsuits and claims purport to represent 899 individual
claimants.
3M has confirmed that approximately 19 of the 899 claimants have opted out of
the revised class action settlement program approved by the United States
District Court for the Northern District of Alabama (the "Revised Settlement
Program") and have 3M implants. Most of the claimants in these confirmed cases
have alleged an unspecified amount of damages above the jurisdictional limit
of the courts in which the cases were filed. The company does not consider its
remaining probable liability for these confirmed cases to be material.
The company believes that most of the remaining 880 claimants will be
dismissed either because the claimants did not have 3M implants or the
claimants accepted benefits under the Revised Settlement Program. Most of
these claimants have filed lawsuits that either do not allege a specific
amount of damages or allege an unspecified amount of damages above the
jurisdictional limit of the court. The rest of these claimants allege damages,
including both actual and punitive damages, aggregating approximately $100
million in their lawsuits. Approximately 150 claimants have filed lawsuits in
state and federal courts in New York alleging damages in excess of $20 million
each. 3M expects that virtually all of these New York cases will be dismissed
without payment for the reasons stated above. The company continues to work to
clarify the status of these lawsuits and claims.
Based on 3M's experience in resolving thousands of these lawsuits, 3M believes
that the amount of damages alleged in complaints is not a reliable or
meaningful measure of the potential liability that 3M may incur in the breast
implant litigation. Investors should place no reliance on the amount of
damages alleged in breast implant lawsuits against 3M.
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 phase of this action 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's rulings in post verdict motions are considered to be generally
favorable to the company. The court awarded the company prejudgment interest
on amounts owing by insurers including reasonable attorney fees. However, the
court has yet to determine the amount of attorneys' fees recoverable by the
company. The court has indicated a formula to be used for this calculation
that would result in the company being reimbursed for less than all of its
fees. Exact amounts cannot yet be determined. The court filed the judgment on
April 16, 2001 and entered judgment on May 16, 2001, thus substantially
concluding this matter in the trial court. The company and several insurers
appealed the judgment to the Minnesota Court of Appeals. The company has also
initiated an arbitration proceeding in London, England to recover insurance
coverage for breast implant liability and costs from claims-made insurance
carriers. The arbitration hearing is currently scheduled for January 2003.
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As of December 31, 2001, the company had receivables for insurance recoveries
related to the breast implant matter of $406 million, representing settled but
yet to be received amounts ($82 million) as well as amounts contested by the
insurance carriers ($324 million). During the fourth quarter of 2001, the
company received payments of $80 million from its 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); (iii) the outcome
of the 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.
Respirator/Mask/Asbestos Litigation
During October 2001, the company defended a case in the Circuit Court of
Holmes County, Mississippi, against plaintiffs claiming that a 3M respirator
and mask did not protect them against contracting claimed asbestos-related
diseases allegedly caused by exposure to products containing asbestos which
were manufactured by other defendants. The case against the company initially
involved six plaintiffs whose claims were consolidated for trial. The court
dismissed one plaintiff's case just before trial, and a second plaintiff
abandoned his case before it was submitted to the jury. On October 26, the
jury returned a verdict against all defendants in favor of the plaintiffs,
four of whom had claims against the company. The jury awarded the plaintiffs
$25 million each in compensatory damages. The jury denied plaintiffs' request
for punitive damages. Based on the jury's findings of percentage of fault
attributable to each defendant, the company's share of the total verdict is
$22.5 million. The company can provide no assurance at this time about the
ability of any co-defendant to pay its share of any ultimate judgment or
whether a co-defendant's inability to pay will cause a reallocation of
liability for damages among the remaining solvent defendants under state law.
Judgment was entered on January 30, 2002. Because the company is vigorously
challenging the judgment in post-trial motions, will plan to appeal if
necessary, and believes that the judgment ultimately will be overturned, no
liability has been recorded related to this matter as of December 31, 2001. If
any damages are ultimately assessed against the company, a substantial portion
of such damages would be covered by the company's product liability insurance.
For more than twenty years, the company has successfully defended and resolved
the claims of approximately 200,000 individual claimants similar to the ones
brought in Holmes County. The company's vigorous defense of this litigation
has resulted in: (i) jury verdicts for the company in the only other two cases
tried to verdict (these two successful verdicts involved allegations virtually
indistinguishable from those of the Holmes County case); (ii) frequent
dismissals of lawsuits without any payment by the company; and (iii) average
settlement values of less than $1,000 for the claims and lawsuits that the
company has resolved. In many of these lawsuits and claims, the company is
named as a defendant with multiple co-defendants where no product the company
manufactured is involved or where the company is ultimately determined not to
have manufactured the products the plaintiffs identified. As noted above, many
of these lawsuits and claims have been dismissed without payment.
As of December 31, 2001, the company is a named defendant, with multiple co-
defendants, in approximately 21,000 lawsuits and claims in various courts.
(The number of lawsuits is not a good indicator of claims and litigation
activity because one lawsuit may represent the claims of one plaintiff or
many. The number of plaintiffs named in any one lawsuit varies by plaintiffs'
counsel and jurisdiction. For this reason, the number of claimants is a
better indicator of claims and litigation activity.) These lawsuits and claims
purport to represent approximately 80,000 individual claimants. A majority of
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these current claimants have not identified specific products manufactured by
the company.
Based on the company's experience, the vast majority of these lawsuits and
claims purportedly relate to the alleged use of company's mask and respirator
products and seek damages from the company and other defendants for alleged
personal injury from occupational exposure to asbestos or, less frequently,
silica found in products manufactured by other defendants. The remaining
lawsuits and claims generally allege personal injury from occupational
exposure to asbestos from unspecified products claimed to have been
manufactured by the company or other defendants and/or from specialty products
containing asbestos allegedly manufactured by the company and/or other
defendants many years ago.
Based on the company's experience in defending and resolving these lawsuits
and claims to date and the substantial product liability insurance provided by
the company's insurers, the company believes these lawsuits and claims will
not have a material adverse effect on its consolidated financial position,
results of operations, or cash flows.
As of December 31, 2001, the company had estimated accrued liabilities of
approximately $156 million for these claims. This amount represents the
company's best estimate of the amount to cover the cost and expense of
resolving current and probable future claims. The company also had receivables
for expected insurance recoveries of approximately $223 million. The
difference between the accrued liability and insurance receivable represents
the time delay between payment of claims and receipt of insurance
reimbursements.
The company's current estimate of its probable liabilities and associated
expenses for respirator/mask/asbestos litigation is based on facts and
circumstances existing at this time and reasonably anticipated trends. New
developments may occur that could affect the company's estimate of probable
liabilities and associated expenses. These developments include, but are not
limited to, (i) changes in the number of future claims, (ii) changes in the
average cost of resolving claims, (iii) change in the nature of claims
received, (iv) changes in the law and procedure applicable to these claims, or
(v) financial viability of other co-defendants and insurers and other unknown
variables. The company cannot determine the impact of these potential
developments on the current estimate of its probable liabilities and
associated expenses.
Environmental Matters
The company's operations are subject to environmental laws and regulations
enforceable by foreign, federal, state, and 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 a basis 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 satisfy 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
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locations. 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 were
not material at these locations nor have there been material changes in the
recorded liabilities for environmental matters.
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 company expects that
the amounts recorded will be paid out over the periods of remediation for the
applicable sites, currently ranging up to 30 years. As of December 31, 2001,
the company had recorded liabilities of $38 million for estimated
environmental investigatory and remediation costs based upon an evaluation of
currently available facts with respect to each individual site.
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'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. The company
cannot determine the impact of these potential developments on the current
estimate of its probable liabilities and associated expenses.
In June 1999, the company entered into a voluntary agreement with the
Environmental Protection Agency (EPA) under both an "Agreement for TSCA
Compliance" and the EPA's Incentives for Self Policing Policy to conduct an
audit of the company's facilities and business units under the Toxic
Substances Control Act (TSCA). The company also later agreed to conduct a
separate TSCA section 8(e) Compliance Audit for materials which under current
EPA guidelines potentially would be subject to notification under section 8(e)
of TSCA and agreed to pay stipulated penalties for each report submitted under
this audit. The company recently agreed to pay $240,000 in penalties under a
proposed settlement agreement with the EPA for phase I and II of the TSCA 8(e)
audit and the parties are negotiating further penalties.
In December 2001, the company has resolved its involvement in a lawsuit that
was filed by the United States on behalf of the Department of the Interior to
recover costs resulting from the alleged disposal of wastes at the Krejci site
in Ohio, by paying $15.5 million into an escrow account under the terms of a
consent decree, subject to court approval, entered into by the company and the
Department of the Interior. If the consent decree is approved by the court,
the money in the escrow account will be paid to the Department of the Interior
and the company will be protected from additional claims, including claims for
contribution by other settling defendants, arising from planned remediation
activities and known natural resource damages at the site. The consent decree
also includes reopener provisions, which are standard in consent decrees
including those signed by the other settling defendants. Given the thorough
site investigation and the extensive future remediation work being undertaken
by other settling defendants, the company believes that its future liability
exposure under the reopener provisions is remote.
12
Item 4. Submission of Matters to a Vote of Security Holders.
None in the quarter ended December 31, 2001.
Part II
Item 5. Market Price of 3M's Common Stock and Related Security Holder Matters.
At January 31, 2002, there were approximately 127,196 shareholders of record.
3M's stock is listed on the New York, Pacific, Chicago and Swiss stock
exchanges. Stock price comparisons are provided in the Quarterly Data section
in the Notes to Consolidated Financial Statements.
Item 6. Selected Financial Data.
(Dollars in millions, except per-share amounts)
Years ended December 31: 2001 2000 1999 1998 1997
Net sales........................... $16,079 $16,724 $15,748 $15,094 $15,133
Income from continuing operations... 1,430* 1,857* 1,763* 1,213** 2,121**
Per share of common stock:
Continuing operations - basic..... 3.63* 4.69* 4.39* 3.01** 5.14**
Continuing operations - diluted... 3.58* 4.64* 4.34* 2.97** 5.06**
Cash dividends declared and paid.. $ 2.40 $ 2.32 $ 2.24 $ 2.20 $ 2.12
At December 31:
Total assets ....................... $14,606 $14,522 $13,896 $14,153 $13,238
Long-term debt (excluding portion due
within one year).................. 1,520 971 1,480 1,614 1,015
The above income and earnings per share information exclude an extraordinary
loss in 1998 ($38 million, or $.09 per diluted share), and the cumulative
effect of accounting change in 2000 ($75 million, or $.19 per diluted share).
*As discussed in the Notes to Consolidated Financial Statements, 2001 includes
a non-recurring net loss of $504 million ($312 million after tax and minority
interest), or 78 cents per diluted share, principally related to charges in
connection with 3M's restructuring plan, acquisition-related charges, a
reversal of a 1999 litigation accrual, and a net gain related to the sale of
available-for-sale equity securities, partially offset by the write-down of
available-for-sale equity securities. 2000 includes a non-recurring net loss
of $23 million ($15 million after tax), or 4 cents per diluted share, related
to the company's phase-out of perfluorooctanyl-based chemistry products in the
Specialty Material segment, a write-down of certain corporate and unallocated
assets, gains related to corporate and unallocated asset dispositions, a gain
from the termination of a product distribution agreement in the Health Care
segment, and other non-recurring items. 1999 includes a net gain of $100
million ($52 million after tax), or 13 cents per diluted share, related to
gains on divestitures, litigation expense, an investment valuation adjustment,
and a change in estimate that reduced 1998 restructuring charges.
** 1998 includes restructuring charges of $493 million ($313 million after
tax), or 77 cents per diluted share. 1997 includes a gain of $803 million
($495 million after tax), or $1.18 per diluted share, on the sale of National
Advertising Company.
13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Accounting Policies
The company has disclosed those accounting policies that it considers to be
significant in determining the amounts to be utilized for communicating its
consolidated financial position, results of operations and cash flows in the
first note to its Consolidated Financial Statements included elsewhere herein.
The company's core activities relate to the development, manufacture and sale
of thousands of products to numerous markets. Although the company's
operations may be considered to be complex, management believes the accounting
principles it utilizes to prepare its consolidated financial statements are
relatively basic, are intended to result in the reporting of reasonably
conservative amounts, and typically only are changed to comply with new
standards promulgated by authoritative bodies. In all material respects, the
accounting principles utilized by the company are in conformity with U.S.
generally accepted accounting principles.
In applying its accounting principles, management must often make individual
estimates and assumptions regarding expected outcomes or uncertainties. As one
would expect, the actual results or outcomes are generally different than the
estimated or assumed amounts. These differences are usually minor and are
included in the consolidated financial statements by management as soon as
they are known. The individual estimates and assumptions generally do not
involve a level of risk or uncertainty that would be material to the
consolidated financial statements as a whole because, although numerous in
number, they generally are relatively immaterial in amount. Many of these
estimates and assumptions relate to current assets and liabilities and,
accordingly, given the relatively short operating cycle of the company, they
are reviewed and updated frequently.
There are estimates and assumptions made by management in preparing the
consolidated financial statements for which actual results will emerge over
long periods of time, such as the assumptions underlying the determination of
the company's pension and postretirement obligations and related periodic
cost, and the assessment of the recoverability of long-lived assets employed in
the business, including assets of acquired businesses. These estimates and
assumptions are closely monitored by management and periodically adjusted as
circumstances warrant. For instance, the expected long-term rate of return on
pension assets may be adjusted based on the emergence of different earnings
trends or prospects, or expected asset lives may be shortened or an impairment
recorded based on a change in the expected use of the asset or performance of
the related business reporting unit. Although there is greater risk with
respect to the accuracy of these long-term estimates and assumptions because
of the long period over which actual results will emerge, such risk is
mitigated by management's ability to make changes in these estimates and
assumptions over the same long period.
In preparing financial statements at any point in time, management is also
periodically faced with uncertainties, the outcomes of which are not within
its control and will not be known for prolonged periods of time. As discussed
in Part I, Item 3 (Legal Proceedings) and the Notes to the Consolidated
Financial Statements, the company is involved in a number of actions,
governmental proceedings and claims related to product liability and
environmental matters. In some actions, the claimants seek damages as well as
other relief, which, if granted would require substantial expenditures.
Management, with the assistance of counsel makes estimates, if determinable,
of its probable liabilities and records such amounts in the consolidated
financial statements. Such estimates may be an amount representing
management's best estimate, or may be the minimum amount of a range of
probable loss when no single best estimate is determinable. Disclosure is
14
made, when determinable, of the additional possible amount of loss on these
claims, or if such estimate cannot be made, that fact is disclosed. The
company and its counsel monitor developments related to these legal matters
and, when appropriate, adjustments are made to recorded liabilities to reflect
current facts and circumstances. With respect to product liability claims, the
company has substantial amounts of insurance available, and management with
the assistance of counsel makes and records estimates of insurance recoverable
for its claims liabilities. Such estimates are also monitored and modified as
appropriate, based on current developments. While the company believes that
the ultimate outcome of all of its actions, governmental proceedings and
claims individually and in the aggregate will not have a material adverse
effect on its consolidated financial position, results of operations or cash
flows, there can be no certainty that the company may not ultimately incur
charges in excess of presently recorded liabilities. While the company
believes such a material adverse impact is unlikely, given the inherent
uncertainty of litigation, a remote possibility exists that a future adverse
ruling or unfavorable development could result in future charges that could
have a material adverse impact on the company.
The company discusses risk management in various places throughout this
document, including discussions in this section concerning Financial Condition
and Liquidity, and Financial Instruments, and in the Notes to Consolidated
Financial Statements (Debt, Other Financial Instruments, and the Derivatives
and Hedging Activities accounting policy). All derivative activity is
governed by written policies, and a value-at-risk analysis is provided for
these derivatives. The company does not have leveraged derivative positions.
All special-purpose entities utilized by the company (such as its captive
insurance company) are consolidated in its results and have economic purpose.
The company does not use special-purpose vehicles for primary financing
purposes.
Based on a critical assessment of its accounting policies and the underlying
judgments and uncertainties affecting the application of those policies,
management believes that the company's consolidated financial statements
provide a meaningful and fair perspective of the company. This is not to
suggest that other general risk factors, such as changes in worldwide economic
conditions, fluctuations in foreign currency exchange rates, achievement of
corporate growth objectives, changes in material costs, performance of
acquired businesses and others, could not adversely impact the company's
consolidated financial position, results of operations and cash flows in
future periods.
15
Operating Results
Sales: Sales in 2001 totaled $16.079 billion, compared with $16.724 billion
in 2000 and $15.748 billion in 1999. In 2001, core volume (which excludes
acquisition and divestiture impacts) declined by 3.5 percent. The stronger
U.S. dollar reduced sales by 3.3 percent.
In 2000, core volume grew 8.5 percent. Selling prices declined about 1.5
percent, mainly due to reductions in certain 3M electronic products both in
the United States and internationally. The stronger U.S. dollar reduced sales
by about 2.5 percent.
In the United States, sales in 2001 totaled $7.546 billion, down 4 percent
from 2000. U.S. core volume declined 6.8 percent. Internationally, sales
totaled $8.533 billion, down 3.8 percent from 2000. International core volume
declined nearly 1 percent. The stronger U.S. dollar reduced international
sales by 6.2 percent. In 2000, U.S. sales increased 4 percent. Volume rose 5
percent, while selling prices were down 1 percent. Internationally, sales
rose 8 percent. Core volume increased 12 percent and selling prices were down
2 percent. The stronger U.S. dollar reduced international sales by 5 percent.
Components of Sales Change
2001 2000
U.S. Intl. W.W. U.S. Intl. W.W.
Volume - core (6.8)% (.7)% (3.5)% 5.0 % 12.0% 8.5%
Volume - acquisitions
and divestitures 2.1 3.0 2.6 - 3.0 1.5
Price .7 .1 .3 (1.0) (2.0) (1.5)
Translation - (6.2) (3.3) - (5.0) (2.5)
Total (4.0)% (3.8)% (3.9)% 4.0% 8.0% 6.0%
Non-recurring items: In 2001, non-recurring items reduced operating income by
$504 million and net income by $312 million, or 78 cents per diluted share.
Non-recurring items of $569 million, principally related to the company's
restructuring plan announced during the second quarter of 2001, were
classified as a component of cost of sales ($249 million); selling, general
and administrative expenses ($300 million); and research, development and
related expenses ($20 million). Of this $569 million, $472 million related to
employee severance and benefits, $80 million related to accelerated
depreciation of property, plant and equipment, and $17 million related to
other exit activities. In addition, cost of sales included other non-
recurring costs of $23 million related to acquisitions. Non-recurring items
included in the other expense (income) line within operating income included a
$73 million reversal of a 1999 litigation accrual related to 3M's successful
appeal in January 2002 in an antitrust case brought by LePage's Inc. On
February 25, 2002, the Third Circuit Court of Appeals vacated its prior ruling
and ordered a re-hearing in May 2002 by the full court. However, the company
continues to believe that it will ultimately prevail in the outcome of this
matter. Also included within the other expense (income) line within operating
income is a net gain of $15 million related to the sale of available-for-sale
equity securities, partially offset by the write-down of available-for-sale
equity securities.
In 2000, non-recurring items reduced net income by $90 million, or 23 cents per
diluted share. Operating income was reduced by $23 million, including costs of
$208 million (reported in cost of sales) and gains of $185 million, included in
the other expense (income) line within operating income. Non-recurring costs
in 2000 included $168 million of costs in the Specialty Material segment
related to the company's phase-out of perfluorooctanyl-based chemistry
products, a $20 million write-down of corporate and unallocated assets, and
$20 million of other non-recurring expenses ($13 million related to
acquisitions in the Electro and Communications segment). Major non-cash
costs included in the previously
16
mentioned items are $73 million of accelerated depreciation and $48 million of
impairment losses, primarily related to production equipment used to
manufacture products phased out in the Specialty Material segment.
Non-recurring gains in 2000 were largely related to asset dispositions,
principally the sale of available-for-sale equity securities, and also
included $50 million from the termination of a product distribution agreement
in the Health Care segment. A cumulative effect of accounting change that
related to a change in the company's revenue recognition policy was also
recorded in 2000, reducing earnings by $75 million after tax.
In 1999, non-recurring items increased operating income by $100 million ($52
million after tax, or 13 cents per diluted share). These costs were included
in the other expense (income) line within operating income. Non-recurring
items included a net gain of $147 million ($81 million after tax) related to
gains on the divestitures of Eastern Heights Bank and certain health care
businesses, net of an investment valuation adjustment. 1999 also included a
charge of $73 million ($46 million after tax) related to an adverse jury
verdict and legal fees associated with a lawsuit filed by LePage's, Inc. In
the third quarter of 1999, the company recorded a change in estimate that
reduced 1998 restructuring charges by $26 million ($17 million after tax).
The table below shows amounts for non-recurring items in 2001, 2000 and 1999,
as well as amounts excluding these items.
Supplemental Consolidated Statement of Income Information
Years ended December 31
Total (excluding
(Millions, except Non-recurring items non-recurring items)
per-share amounts) 2001 2000 1999 2001 2000 1999
Net sales $ -- $ -- $ -- $16,079 $16,724 $15,748
Cost of sales 272 208 -- 8,477 8,579 8,126
Selling, general and
administrative expenses 300 -- -- 3,761 3,963 3,712
Research, development
and related expenses 20 -- -- 1,064 1,101 1,056
Other expense (income) (88) (185) (100) -- -- (2)
Operating
income (loss) $(504) $ (23) $ 100 $2,777 $3,081 $2,856
Interest expense
and (income) - net -- -- -- 87 84 76
Income (loss) before
income taxes, minority
interest, and
cumulative effect
of accounting change (504) (23) 100 2,690 2,997 2,780
Provision (benefit)
for income taxes (184) (8) 48 886 1,033 984
Effective tax rate -- -- -- 32.9% 34.5% 35.4%
Minority interest (8) -- -- 62 92 85
Income (loss) before
cumulative effect of
accounting change $(312) $ (15) 52 $1,742 $1,872 $1,711
Cumulative effect of
accounting change -- (75) -- -- -- --
Net income (loss) $(312) $ (90) $ 52 $1,742 $1,872 $1,711
Per share - diluted (.78) (.23) .13 4.36 4.68 4.21
17
The following discussion excludes the impact of non-recurring items in all
years, except where indicated.
(Percent of sales) 2001 2000 1999
Cost of sales 52.7 51.3 51.6
Selling, general and administrative expenses 23.4 23.7 23.6
Research, development and related expenses 6.6 6.6 6.7
Operating income 17.3 18.4 18.1
Costs: In 2001, cost of sales was 52.7 percent of sales, up 1.4 percentage
points from 2000. Gross margins were negatively affected by slowing worldwide
market demand and negative currency impacts, partially offset by good
manufacturing indirect-cost control. In 2000, gross margins benefited from
volume growth, productivity gains and lower employee benefit costs, but were
negatively affected by raw material costs and currency effects. Cost of sales
includes manufacturing, engineering and freight costs.
Selling, general and administrative (SG&A) expenses were 23.4 percent of sales
in 2001, 23.7 percent in 2000 and 23.6 percent in 1999. In 2001, these
expenses benefited from indirect-cost control and productivity gains related to
restructuring actions. In 2000, these expenses reflected increased new product
investments. SG&A expenses in 2000 benefited from lower employee benefit
costs. Goodwill and indefinite-lived tradename amortization, included in SG&A,
totaled $67 million in 2001 and $44 million in 2000. Under the new "Goodwill
and Other Intangible Assets" accounting standard (discussed later), this
amortization will cease effective January 1, 2002. Excluding goodwill and
indefinite-lived tradename amortization, SG&A as a percent of sales for 2001
would total 23.0 percent, and for 2000 would total 23.4 percent.
Operating income: Operating income totaled $2.777 billion in 2001, down 9.9
percent from 2000. Operating income was 17.3 percent of sales, down from 18.4
percent in 2000 and 18.1 percent in 1999. In 2001, slowing worldwide market
demand and negative currency effects were partially offset by good indirect-
cost control. In 2000, volume growth and productivity gains drove most of the
improvement in operating income. Lower employee benefit costs resulting from
lower pension expense, primarily in the United States, increased operating
profit margins in 2000 by an estimated five-tenths of a percentage point.
This benefit was more than offset by higher payroll costs and other
inflationary impacts. The company estimates that currency effects reduced
operating income by about $175 million in 2001, $78 million in 2000 and $18
million in 1999.
In the United States, operating income in 2001 decreased about 11.5 percent
and profit margins were down slightly more than one percentage point. In
2000, operating income decreased 3 percent and profit margins were down one
percentage point.
Internationally, operating income in 2001 decreased 9 percent and profit
margins decreased slightly more than one percentage point. In 2000, operating
income increased 16 percent and profit margins increased 1.4 percentage points.
Interest expense and income: Interest expense was $124 million in 2001,
compared with $111 million in 2000 and $109 million in 1999. The increase in
2001 reflected higher average debt levels, partially offset by lower interest
rates. Interest income was $37 million in 2001, compared with $27 million in
2000 and $33 million in 1999. The higher level in 2001 reflected higher
interest income due to larger average cash balances.
18
Provision for income taxes: The worldwide effective income tax rate was 32.9
percent in 2001, 34.5 percent in 2000 and 35.4 percent in 1999. Including non-
recurring items, 3M's effective tax rate was 32.1 percent in 2001, compared
with 34.5 percent in 2000 and 35.8 percent in 1999. The decrease in both 2001
and 2000 was primarily due to a decrease in the average effective tax rate for
international operations, and in 2001 also reflected the impact of recurring
tax credits on lower-than-expected profit levels.
Minority interest: Excluding non-recurring items in 2001, minority interest
was $62 million, compared with $92 million in 2000 and $85 million in 1999.
Minority interest represents the elimination of the non-3M ownership
interests, primarily in Sumitomo 3M Limited and Dyneon LLC (in 1999 only). The
decrease in 2001 was driven by lower profits in Sumitomo 3M. The increase in
2000 reflects higher profits in Sumitomo 3M, partially offset by a decrease as
a result of 3M's acquisition of the 46 percent minority interest in Dyneon in
December of 1999. This acquisition is discussed in the Notes to Consolidated
Financial Statements.
Net income: Net income totaled $1.742 billion, or $4.36 per diluted share,
compared with $1.872 billion, or $4.68 per diluted share, in 2000, and $1.711
billion, or $4.21 per diluted share, in 1999. Per-share income decreased 6.8
percent in 2001 and increased 11.2 percent in 2000.
In 2001, 2000 and 1999, currency effects reduced net income by an estimated
$94 million (24 cents per share), $55 million (14 cents per share) and $23
million (6 cents per share), respectively. These estimates include the effect
of translating profits from local currencies into U.S. dollars; the impact of
currency fluctuations on the value of goods transferred between 3M operations
in the United States and abroad; and realized foreign currency transaction
gains and losses, including derivative instruments designed to reduce exchange
rate risks. In 2001, 2000 and 1999, derivative and other transaction gains
and losses increased net income by an estimated $29 million, $21 million and
$4 million, respectively.
Employment:
At December 31, 2001, employment totaled 71,669 people, a decrease of about
3,350 from year-end 2000, due to both restructuring actions and attrition. In
the first quarter of 2001, primarily related to three notable acquisitions,
employment increased by about 2,650. Since March 31, 2001, employment has
declined by 6,000 people, with 3,500 related to the restructuring plan, 1,500
due to the integration of recent acquisitions and 1,000 due to attrition. At
December 31, 2000, employment totaled 75,026, an increase of about 4,500 from
year-end 1999, with about 3,400 of the increase due to acquisitions. Sales per
employee in local currencies decreased about 3 percent in 2001, increased
about 7 percent in 2000, and increased about 10 percent in 1999.
Restructuring charges and other non-recurring items:
During the first half of 2001, the company developed and announced a
restructuring plan that consolidates certain operations and streamlines the
organization to increase speed and productivity. In June 2001, the company
completed the identification of all significant actions to be taken and
obtained final approvals from the appropriate level of management. In the
fourth quarter of 2001, the company obtained approvals for certain additional
actions. The company's current estimate for total charges, principally related
to the restructuring plan, is about $750 million (including pre-tax charges
of $569 million taken in 2001 that related principally to these actions).
These charges are discussed in the Notes to Consolidated Financial Statements.
19
In connection with its restructuring plan, the company expects to eliminate a
total of about 6,000 positions, with most of these reductions occurring by June
30, 2002. Through December 31, 2001, the company had eliminated about 3,500
positions. These positions represent a wide range of functions throughout the
company. Of the 6,000 employment reduction for the total plan, about 40
percent will occur in the United States, 35 percent in Europe, and the balance
in other international areas. All business segments will be impacted directly
and also indirectly through reduced allocations of corporate staff service
costs. The impact of the total restructuring, including the allocated portion
of restructured staff services, is estimated by segment as follows:
Industrial, 35 percent; Electro and Communications, 20 percent; Transportation,
Graphics and Safety, 20 percent; Health Care, 10 percent; Consumer and Office,
10 percent; and Specialty Material, 5 percent. These estimates are provided
only as a frame of reference as to the order of magnitude by segment. The
restructuring costs have not been recorded in the individual business segments,
which enhances comparability and reflects management focus on ongoing results.
In 2002, the company expects to take additional charges of about $200 million.
The remaining charges will include accelerated depreciation related to
consolidating or downsizing certain manufacturing operations, employee
severance and benefit costs, and other incremental restructuring-related exit
costs. Related to this restructuring plan, the company estimates it saved $80
million in the second half of 2001. The company expects additional savings of
approximately $300 million in 2002, with a somewhat greater rate of savings in
the second half than in the first half of the year. The vast majority of the
savings will be reduced employee costs. The 2001 savings were most prominent
in SG&A, with cost of sales benefits occurring in late 2001 and into 2002.
Numerous factors may create offsets to these savings, such as the potential
for continued weakness in sales volumes, normal increases in compensation and
benefits, and other inflationary pressures. The company has not discontinued
any major product lines as a result of this restructuring.
Employee severance and benefit charges totaling $472 million were taken during
2001. These charges were taken in the quarter when management approved the
plans and after severance benefits had been communicated to the employees.
While the majority of employee severance already has been accrued, additional
communications to affected international employees will occur in the first half
of 2002, resulting in additional charges.
Of the company's remaining current liability at December 31, 2001, $185 million
is classified in current liabilities (payroll) and $13 million is classified in
other current liabilities on the Consolidated Balance Sheet. The company
classified $124 million of the current year's charges as long-term liabilities.
Special termination pension and medical benefits, aggregating $62 million, were
offered to eligible employees. These benefits will generally be paid over their
life expectancies. In addition, the company estimates that $62 million of
deferred separation pay will be paid in 2003 and beyond. The company also
recorded $8 million of non-cash stock option expense due to the
reclassification of certain employees age 50 and older to retiree status,
resulting in a modification of their original stock option awards for
accounting purposes. The current liabilities and a portion of the non-current
liabilities will be funded through cash provided by operations, with additional
funding for non-current liabilities provided through established pension and
postretirement trust funds.
20
Selected information related to these 2001 charges follows.
Employee
Severance
and Accelerated
(Millions) Benefits Depreciation Other Total
-------- ------------ ------ ------
2001 charges
Second quarter $386 $-- $11 $397
Third quarter 27 39 3 69
Fourth quarter 59 41 3 103
---- ---- ---- ----
Total charges $472 $80 $17 $569
Cash payments (155) (4) (159)
Non-cash (8) (80) -- (88)
Long-term portion
of liability (124) -- (124)
Current liability at
December 31, 2001 $185 $13 $198
==== ==== ====
Selected information related to the company's 1998 restructuring program follows.
Employee Write-down
Severance of Property,
and Plant and
(Millions) Benefits Equipment Other Total
-------- ------------ ------- ---------
1998 charges $271 $143 $79 $493
1999 changes in estimates 4 (31) (1) (28)
Total charges $275 $112 $78 $465
December 31, 1998 liability $232 $32 $264
1999 cash payments (205) (23) (228)
1999 changes in estimates 4 (1) 3
December 31, 1999 liability $ 31 $ 8 $ 39
2000 cash payments (24) (4) (28)
December 31, 2000 liability $ 7 $ 4 $ 11
2001 cash payments (3) (2) (5)
December 31, 2001 liability $ 4 $ 2 $ 6
21
Goodwill and other intangible assets:
The Financial Accounting Standards Board (FASB) recently issued Statement No.
142, "Goodwill and Other Intangible Assets," which will be adopted by the
company effective January 1, 2002. Goodwill and intangible assets acquired
after June 30, 2001, are subject immediately to the non-amortization and
amortization provisions of this statement, while existing goodwill and other
indefinite-lived assets will no longer be amortized beginning January 1, 2002.
Goodwill will be subject to an impairment test at least annually. A
preliminary review indicated that no impairment existed at December 31, 2001.
Additional information regarding recent accounting pronouncements of the FASB,
including Statement No. 142, is included under "Significant Accounting
Policies - New Accounting Pronouncements", in the Notes to Consolidated
Financial Statements. Goodwill and indefinite-lived tradename amortization
totaled 12 cents per diluted share in 2001 and 9 cents per diluted share in
2000. The impact of Statement No. 142 on previously reported results,
and the impact by business segment, follow.
Goodwill and Indefinite-Lived Tradenames
Supplemental Consolidated Statement of Income Information
Years ended December 31
(Amounts in millions, except per-share amounts) 2001 2000
Reported net income $1,430 $1,782
Add back: Goodwill and indefinite-lived
tradename amortization - net 51 32
Adjusted net income $1,481 $1,814
Earnings per share - basic
Reported net income $ 3.63 $ 4.50
Goodwill and indefinite-lived
tradename amortization - net .13 .08
Adjusted net income $ 3.76 $ 4.58
Earnings per share - diluted
Reported net income $ 3.58 $ 4.45
Goodwill and indefinite-lived
tradename amortization - net .12 .09
Adjusted net income $ 3.70 $ 4.54
Goodwill and Indefinite-Lived Tradenames
Supplemental Business Segment Information
Asset balance Amortization
at December 31 Year Year
(Millions) 2001 2000 2001 2000
Transportation, Graphics and Safety $ 169 $ 90 $ 13 $ 5
Health Care 344 136 22 15
Industrial 17 14 1 3
Consumer and Office 19 27 2 2
Electro and Communications 361 296 23 14
Specialty Material 126 118 6 5
Total Company $1,036 $ 681 $ 67 $ 44
Income taxes (12) (12)
Minority interest (4) --
Amortization - net of income taxes and minority interest $ 51 $ 32
22
Other new accounting pronouncements:
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations". SFAS No. 141 applies to all business combinations
with a closing date after June 30, 2001. The most significant changes made
by SFAS No. 141 are: 1) requiring that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001, and 2)
establishing specific criteria for the recognition of intangible assets
separately from goodwill.
In June 2001, the Financial Accounting Standards Board also issued Statement
of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations", which must be adopted no later than January 1, 2003.
This statement establishes accounting standards for recognition and
measurement of a liability for an asset retirement obligation and the
associated asset retirement cost. 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.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets, which will be
adopted by the company on January 1, 2002. The company does not expect this
standard to have a material impact on its consolidated financial statements.
This standard broadens the presentation of discontinued operations to include
more disposal transactions, thus the recognition of discontinued operations is
expected to become more common under this new standard.
The company will adopt Emerging Issues Task Force Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products" effective January 1, 2002. This statement addresses
whether certain consideration from a vendor to a reseller of the vendor's
products is an adjustment to selling prices or a cost. It is estimated that
this statement will result in Consumer and Office segment annual net sales and
advertising cost (included in selling, general and administrative expenses)
being reduced by approximately $25 million annually for years 1999 through
2001. This statement would have no effect on the company's net income or its
financial position.
Performance by Business Segment
Disclosures relating to 3M's business segments are provided in this Annual
Report on Form 10-K, Item 1, Business Segments. Financial information and
other disclosures, including discussion of non-recurring items, are provided
in the Notes to Consolidated Financial Statements.
Transportation, Graphics and Safety Markets (22 percent of consolidated
sales):
This market provides products for transportation safety, commercial graphics,
respiratory protection, optical display, automotive and personal safety.
Sales in 2001 totaled $3.526 billion, up slightly from 2000. Operating income
decreased about 10 percent in 2001, excluding $7 million of non-recurring
acquisition costs in 2001. This segment increased volume about 7 percent
(about 3 percent excluding acquisitions). Growth was strong in the optical
films business and occupational health and environmental safety business.
3M's optical films business broadened its product offerings with
the acquisition of two touch screen companies in 2000 and early 2001.
Operating income margins declined due to soft overall sales and due to lower
margins in acquired businesses.
23
Health Care Markets (21 percent of consolidated sales):
This market provides innovative products that improve people's health and
well-being, including dental, medical supplies, pharmaceuticals and health
information systems. Sales totaled $3.419 billion, up about 9 percent from
2000 (up about 4 percent adjusted for acquisitions). Growth was led by
pharmaceuticals, dental and orthodontic products, and health information
systems. In early 2001, 3M combined its German dental business with ESPE
Dental AG, a leading German supplier of crowns, bridges, and other dental
products. As controlling shareholder (the minority shareholders have no
participating rights), 3M consolidates this company into its results. Health
Care operating income was up about 23 percent in 2001, excluding a $50 million
pre-tax benefit in 2000 from the termination of a product distribution
agreement and excluding $10 million of non-recurring acquisition costs in 2001.
Factory productivity and lower SG&A spending both contributed to this
operating income improvement.
In September 2001, the pharmaceutical division signed an agreement with Eli
Lilly and Company to collaborate on resiquimod, a potential breakthrough
treatment for genital herpes. Resiquimod is currently in Phase 3 clinical
trials, and moving toward an anticipated 2004 submission date to the FDA. 3M
received $100 million in the fourth quarter of 2001 from Eli Lilly in
consideration for research and development efforts. The majority of the $100
million is expected to be recognized as revenue in 2002 through 2004, as the
majority of the future research and development expenditures are expected to
be incurred during this period.
Industrial Markets (20 percent of consolidated sales):
This market provides tapes, coated and nonwoven abrasives, and specialty
adhesives. Sales totaled $3.199 billion, down about 9 percent from 2000.
Volume declined about 7.5 percent, reflecting weakness in most manufacturing
sectors of the economy in 2001. Operating income decreased about 19 percent
to $518 million. Aggressive cost controls helped minimize the effect of lower
sales volumes on profit margins. This market has implemented structural
changes to improve its competitive position. For example, this market
consolidated and shifted manufacturing operations globally to shorten cycle
times, serve customers better and employ capital more efficiently.
Consumer and Office Markets (17 percent of consolidated sales):
This market supplies products that help keep homes cleaner, offices organized
and buildings maintained. Sales totaled $2.724 billion, down about 4 percent
from 2000. Despite a volume decline of about 3 percent related to difficult
market conditions, this segment was able to increase its operating income by
about 3 percent through cost-improvement actions. This segment experienced
excellent growth in the construction and home improvement business. Overall
growth was held back by softness in most other areas.
Electro and Communications Markets (14 percent of consolidated sales):
This market supplies connecting, splicing, insulating and protective products
for the electronics, communications and electrical industries. Sales totaled
$2.171 billion, down 12 percent from 2000 (down about 18 percent after
adjusting for acquisitions). This segment experienced the effects of sharply
lower global activity in the electronics and communications industries, and
was also penalized by strong negative currency impacts. Operating income for
this market decreased 46 percent, negatively impacted by declining sales and
acquisition impacts. In 2000, 3M acquired 91 percent (subsequently increased
to 93 percent) of Quante AG, a German-based telecommunications supplier, and
purchased the multi-layer integrated circuit packaging line of W. L. Gore and
Associates. In early 2001, 3M also completed the acquisition of Robinson
Nugent, Inc., a U.S.-based manufacturer of electronic interconnects.
24
Specialty Material Markets (6 percent of consolidated sales):
This market provides high-value materials for demanding applications in
chemical processing, automotive, electronics, telecommunications and other
industries. Sales totaled $1.022 billion, down 15 percent from 2000. In May
2000, 3M announced its intent to substantially phase-out production by the end
of 2000 of the perfluorooctanyl-based chemistry used to produce certain
repellents and surfactant products. The affected product lines represented
about $300 million in annual sales with an operating income margin around 20
percent. Overall sales were affected by this phase-out. The company has
introduced alternatives for some applications and industry segments, including
carpet protection. Operating income in 2000 includes non-recurring costs
of $168 million related to the company's decision to phase-out the
perfluorooctanyl-based chemistry products. Excluding these non-recurring items
in 2000, operating income declined 37 percent in 2001, primarily impacted by
the 13.5 percent volume decline.
Performance by Geographic Area
Financial information, including discussion of non-recurring items, related to
3M operations in various geographic areas is provided in the Notes to
Consolidated Financial Statements. Non-recurring pre-tax losses of $504
million in 2001, primarily related to the restructuring, are included in
Eliminations and Other (not assigned to a specific geographic area).
United States (47 percent of consolidated sales):
Sales in the United States totaled $7.546 billion, down about 4 percent from
2000. U.S. core volume declined 6.8 percent. Operating income was down about
11.5 percent, impacted by volume declines. In 2000, good volume growth and
productivity gains helped results, while increased new product investments
held back overall profit growth. Operating income was 13.6 percent of sales in
2001, down from 14.8 percent in 2000.
Europe and Middle East (25 percent of consolidated sales):
Sales in Europe and the Middle East totaled $3.960 billion, up slightly from
2000. Local-currency sales increased about 3.5 percent on a reported basis
and decreased about 2 percent excluding acquisitions. Currency translation
reduced sales by about 3 percent. Despite significant unfavorable currency
effects, operating income decreased by only 3 percent. Operating income was
14.4 percent of sales, compared with 14.9 percent of sales in 2000.
Asia Pacific (19 percent of consolidated sales):
Sales in Asia Pacific totaled $3.043 billion, down about 8.6 percent from
2000. Volume in the Asia Pacific area increased 2.4 percent in 2001. Selling
prices decreased 1.7 percent, while currency translation decreased sales by
9.3 percent. Operating income was 26.5 percent of sales, down from 28.9
percent in 2001, affected by a significant slowdown in the electronics
businesses and unfavorable currency effects. In Japan, home of 3M's largest
international company, volume increased about 1.5 percent. Volume in Asia
outside Japan increased 3.3 percent in 2001.
Latin America, Canada and Africa (9 percent of consolidated sales):
Sales in Latin America, Canada and Africa combined totaled $1.496 billion,
down about 4.4 percent from 2000. In Latin America, local-currency sales
increased 3.4 percent. Currency reduced Latin America sales by about 8.3
percent. The peso devaluation in Argentina did not have a material impact on
the company. In Canada, local-currency sales increased 1.6 percent. Operating
income for Latin America, Canada and Africa was 24.1 percent of sales,
essentially unchanged from 2000.
25
Financial Condition and Liquidity
3M's financial condition remained strong in 2001. The company's key inventory
index was 3.1 months, down from 3.4 months at year-end 2000. The accounts
receivable index was 59 days, down one day from 2000. The current ratio was
1.4, up from 1.3 at the end of 2000. Various assets and liabilities,
including cash and short-term debt, can fluctuate significantly from month to
month depending on short-term liquidity needs.
Cash flows provided by operating activities totaled $3.078 billion in 2001,
compared with $2.326 billion in 2000 and $3.081 billion in 1999. In 2001,
working capital reductions drove the increase. In 2000, certain working
capital increases, partially driven by the 10 percent increase in sales
volume, reduced cash provided by operating activities. It is estimated that
restructuring-related cash outflows will approximate $300 million in 2002. The
current liabilities and a portion of the non-current liabilities related to the
restructuring liability will be funded through cash provided by operations,
with additional funding for non-current liabilities provided through
established pension and postretirement trust funds. As discussed in the
"Performance by Business Segment" section of this report, 3M received $100
million from Eli Lilly and Company in the fourth quarter of 2001 relating to
a pharmaceutical agreement. The majority of the $100 million is expected to
be recognized as revenue in 2002 through 2004, as the majority of the future
research and development expenditures are expected to be incurred during this
period. In 2001, 3M made cash payments of $159 million related to its 2001
restructuring plan. Related to its 1998 restructuring plan, the company made
cash payments of $28 million in 2000 and $228 million in 1999. In 2001, 2000
and 1999, 3M's insurance recoveries, net of claims paid, related to the mammary
implant matter totaled $101 million, $49 million and $93 million, respectively.
Most of the company's implant liabilities have been paid; accordingly, receipt
of related insurance recoveries will increase future cash flows. For a more
detailed discussion, refer to Part I, Item 3, Legal Proceedings, of this
Annual Report on Form 10-K.
Purchases of property, plant and equipment totaled $980 million, a decrease of
about 12 percent from 2000. This followed an increase of about 6 percent in
2000 compared with 1999. These investments are helping to meet product demand
and increase manufacturing efficiency. Proceeds from the sale of property,
plant and equipment totaled approximately $100 million in each of the last
three years.
Cash used for acquisitions of businesses totaled $218 million, $472 million
and $374 million in 2001, 2000 and 1999, respectively. There were three
notable business combinations in 2001. 3M acquired MicroTouch Systems Inc., a
touch screen manufacturer, for $158 million in cash, net of cash acquired. 3M
also acquired Robinson Nugent, Inc., a telecommunications supplier, in exchange
for 1,124,135 shares of 3M common stock. 3M also combined its German dental
business (3M Inter-Unitek GmbH, an existing 3M subsidiary) with ESPE Dental AG,
a dental products manufacturer. 3M Inter-Unitek GmbH acquired 100 percent of
the outstanding shares of ESPE Dental AG in exchange for 43 percent ownership
in 3M Inter-Unitek GmbH and $25 million, net of cash acquired. Acquisition
activity in 2001 also included the purchase, for less than $50 million, of
five smaller companies that had combined annual sales of less than $50 million.
Acquisitions in 2000 included the purchase of 91 percent (subsequently
increased to 93 percent) of Quante AG (a telecommunications supplier); the
purchase of the multi-layer integrated circuit packaging line of W.L. Gore and
Associates; and the acquisition of seven smaller businesses. These seven
smaller businesses had a combined purchase price of less than $125 million
and combined annual sales of less than $75 million. In 1999, 3M completed
one notable business combination, with a purchase price of about $340 million,
that related to the acquisition of the outstanding minority interest in Dyneon
LLC. In
26
addition, seven other acquisitions had a combined purchase price of less than
$50 million and had combined annual sales of less than $50 million.
Cash proceeds from the sale of businesses totaled $11 million, $1 million and
$249 million in 2001, 2000 and 1999, respectively. Cash proceeds in 1999
principally related to divestitures of Eastern Heights Bank, the cardiovascular
systems business and other health care businesses.
Purchases of investments totaled $12 million in both 2001 and 2000, and $56
million in 1999. These purchases include patents and equity investments.
In 2001, the decrease in net short-term debt of $20 million includes the
portion of short-term debt with original maturities of three months or less.
Repayment of debt of $1.564 billion includes $948 million of commercial paper
having original maturities greater than three months. Proceeds from debt of
$1.693 billion includes $1.081 billion of commercial paper having original
maturities greater than three months.
Total debt at December 31, 2001, was $2.893 billion, up from $2.837 billion at
year-end 2000. Total debt was 32 percent of total capital, compared with 30
percent at year-end 2000. In December 2000, the company issued approximately
$350 million of debt securities, remarketable annually (with a final maturity
date of December 2010), which is classified as short-term debt. In October
2000, the company filed a shelf registration with the Securities and Exchange
Commission relating to the potential offering of debt securities of up to $1.5
billion. After the shelf registration became effective, the company, in May
2001, established under the shelf a medium-term notes program through which up
to $1.4 billion of medium-term notes may be offered. 3M plans to use the net
proceeds from future issuances of debt securities under these registrations for
general corporate purposes, including the repayment of debt or the financing of
possible acquisitions. As of December 31, 2001, $550 million of medium-term
notes had been issued under the medium-term note program and another $56
million of debt securities had been issued directly from the shelf,
aggregating $606 million debt securities offered for 2001 under the shelf.
The company expects to issue three-year notes of approximately $400 million
under its medium-term note program in March 2002.
The company's liquidity position remains strong. Primary short-term liquidity
needs are provided through U.S. commercial paper and euro commercial paper
issuances. At year-end 2001, outstanding total commercial paper issued
totaled $876 million and averaged approximately $1 billion during 2001.
Medium-term note shelf borrowing capacity, as discussed previously, totaled
$850 million at year-end 2001. Credit support for outstanding commercial paper
is provided by a $565 million, 364-day credit agreement among a group of
primary relationship banks. The facility provides for up to $65 million in
letters of credit ($59 million of which was outstanding at December 31, 2001).
An additional letter of credit of $266 million is dedicated to the
reacquisition of 3M Inter-Unitek GmbH shares issued in connection with the
ESPE Dental AG business combination, with the shares subject to put options
exercisable by the former shareholders of ESPE Dental AG from the date of
acquisition until January 10, 2003. Committed credit facilities of $93 million
are in place across several international subsidiary locations. The company
also has uncommitted lines of credit totaling $125 million. The company
expects to renew the committed lines of credit facilities in 2002. The
company believes it is unlikely that its access to the commercial paper market
will be restricted. Cash and cash equivalents and certain other current
assets could provide additional liquidity to meet near term obligations, if
necessary.
Certain debt agreements ($565 million of short-term lines of credit, $350
million of dealer remarketable securities, and the $303 million of ESOP debt)
27
have ratings triggers (BBB-/Baa3 or lower) that would require repayment of
debt. The company currently has an AA/Aa1 rating.
3M entered into put/call option agreements with former shareholders of ESPE
Dental AG. Under the put agreements, 3M would be required to purchase the 43
percent minority interest in 3M Inter-Unitek GmbH from former shareholders in
ESPE Dental AG for cash of approximately $266 million. This aggregate put
option amount is expected to approximate the recorded minority interest
liability at the date of exercise. These put options became exercisable on
the acquisition date and expire on January 10, 2003. The call options, if
exercised, would require the minority shareholders to sell their 3M
Inter-Unitek GmbH shares to 3M, based upon a formula set forth in the
agreement. These call options become exercisable on December 20, 2003, and
expire on June 30, 2004.
A summary of the company's significant contractual obligations follows.
Capital lease obligations, unconditional purchase obligations, and other
contractual obligations are not significant. The ESOP debt guarantee is
included in long-term debt.
Payments due by year
Contractual ------------------------------------------------
Obligations 2003- 2005- After
(Millions) Total 2002 2004 2006 2006
------------------------------------------------------------------------------
Long-term debt
(including current portion) $1,557 $ 37 $716 $ 76 $ 728
Leases 339 79 115 48 97
Total contractual cash
obligations $1,896 $116 $831 $124 $ 825
Repurchases of 3M common stock totaled $1.322 billion in 2001, compared with
$814 million in 2000 and $825 million in 1999. Repurchases were made to
support the company's management stock option plan, its general employees'
stock purchase plan, and for other corporate purposes. In November 2001, the
Board of Directors authorized the repurchase of up to $2.5 billion of the
company's common stock. This share repurchase authorization is effective from
January 1, 2002, through December 31, 2003. In 2001, under preceding
authorizations, the company purchased about 12 million shares.
In 2000 and 1999, a reduction in annual weighted average diluted shares
outstanding (including the effects of repurchases, issuances and dilution)
resulted in a benefit of 8 cents per diluted share and 2 cents per diluted
share, respectively. There was no impact in 2001.
Cash dividends paid to stockholders in 2001 totaled $948 million, or $2.40 per
share. 3M has paid dividends since 1916. In February 2002, the Board of
Directors increased the quarterly dividend on 3M common stock to 62 cents per
share, equivalent to an annual dividend of $2.48 per share. This marks the
44th consecutive year of dividend increases.
Future Outlook
Despite the near-term economic challenges, 3M is poised for greater success
via fundamental changes aimed at accelerating growth, increasing productivity
and improving asset turnover. 3M expects to emerge from the current economic
situation as both a stronger and leaner enterprise.
3M launched several initiatives in 2001 that minimized the impact of economic
challenges. 3M's Indirect-Cost Control initiative saved over $500 million
compared with 2000. 3M expects another $150 million of savings from this
initiative in 2002. 3M's Sourcing initiative saved over $100 million in 2001,
with another $150 million expected in 2002. Other initiatives include
eProductivity, where 3M believes it has a significant digitization
28
opportunity, and expects $50 million of benefits in 2002; 3M Acceleration,
where R&D resources are reallocated to larger, more global projects; and Six
Sigma, which focuses on higher growth, lower costs and greater cash flow, and
from which 3M expects over $200 million of operating income benefits in 2002.
These initiatives, combined with the company's restructuring plan, are
expected to lower costs by more than $1 billion during the 2001 to 2002 time
period, even recognizing the initiatives' overlapping impact. These benefits
have been built into the earnings projections discussed next.
For 2002 in total, earnings per share, excluding non-recurring items, are
expected to be within a range of $4.60 to $5.05 per share. The lower end of
the range assumes volume declines of 2 percent, while the top end assumes
volume increases of 3 percent. The high end of the range assumes some global
economic recovery in the second half of the year. However, first quarter 2002
will be a tougher comparison given that our businesses internationally
remained quite strong at the beginning of 2001. Earnings for the first
quarter of 2002, excluding non-recurring items, are expected to be within a
range of $1.05 to $1.20 per share. The lower end of the range assumes volume
declines of 6 percent, while the top end assumes volume declines of 3 percent.
These ranges assume a positive 12 cent annual impact due to ceasing goodwill
and indefinite-lived tradename amortization in accordance with the company's
adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," effective January 1, 2002.
Capital expenditures are expected to total less than $1 billion in 2002.
Financial Instruments
The company enters into contractual derivative arrangements in the ordinary
course of business to manage foreign currency exposure, interest rate risks
and commodity price risks. A financial risk management committee, composed of
senior management, provides oversight for risk management and derivative
activities. This committee determines the company's financial risk policies
and objectives, and provides guidelines for derivative instrument utilization.
This committee also establishes procedures for control and valuation, risk
analysis, counterparty credit approval, and ongoing monitoring and reporting.
The company enters into foreign exchange forward contracts, options and swaps
to hedge against the effect of exchange rate fluctuations on cash flows
denominated in foreign currencies and certain intercompany financing
transactions. The company manages interest rate risks using a mix of fixed and
floating rate debt. To help manage borrowing costs, the company may enter into
interest rate swaps. Under these arrangements, the company agrees to exchange,
at specified intervals, the difference between fixed and floating interest
amounts calculated by reference to an agreed-upon notional principal amount.
The company manages commodity price risks through negotiated supply contracts,
price protection swaps and forward physical contracts.
A variance/co-variance statistical modeling technique was used to test the
company's exposure to changes in currency and interest rates and assess the
risk of loss in after-tax earnings of financial instruments, derivatives and
underlying exposures outstanding at December 31, 2001. The model (third-party
bank dataset) used a 95 percent confidence level over a 12-month time horizon.
Based on this analysis of the interest rate risks, possible changes in
interest rates would not adversely impact after-tax earnings by a material
amount ($6 million at December 31, 2001). Based on this analysis of the
primary foreign exchange risks, possible changes in exchange rates could
adversely impact after-tax earnings by $57 million. This model analyzed more
than 20 different currencies, but does not purport to represent what actually
will be experienced by the company. This model does not include certain hedge
transactions, because the company believes their inclusion would not
materially impact the results. The company used a different modeling dataset
in 2001, but still used the variance/co-variance technique and used a 12-month
29
time horizon (versus the one-month time horizon used in 2000). The company
does not believe a statistical modeling comparison to 2000 is beneficial, as
the company increased both the amount and duration of its foreign currency
hedges in 2001. The company also believes it is impracticable (considering
cost-benefit criteria) to perform a comparable calculation for 2000.
The company is increasingly striving to move costs outside the United States
to naturally protect 3M from currency fluctuations. In 2001, the company
increased the amount and duration of its foreign currency hedges to help
lessen year-over-year impacts and to improve the predictability of future
earnings. However, this hedging program will not make 3M immune to currency
impacts.
Sensitivity analysis was used to assess commodity risks. The sensitivity
analysis technique used evaluates the effect that changes in the market value
of commodities will have on the company's commodity derivative instruments.
At year-end 2001 and 2000, the potential change in fair value of commodity
derivative instruments, assuming a 10 percent adverse change in the underlying
commodity price, was not material ($4 million after tax at December 31, 2001).
The global exposures related to purchased components and materials are such
that a one percent price change would result in a pre-tax cost or savings of
approximately $40 million per year. Derivative instruments are used to hedge
about one percent of this purchased components and materials exposure. The
global energy exposure is such that a 10 percent price change would result in
a pre-tax cost or savings of approximately $25 million per year. Derivative
instruments are used to hedge about 10 percent of this energy exposure.
The Euro Conversion
In February 1997, the company created a European Monetary Union (EMU) Steering
Committee and project teams. The objective of these teams was to ensure a
smooth transition to EMU for the company. The scope of the teams' efforts
included (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 could process
transactions in euros and local currencies during the transition period and
would be converted to the euro by December 31, 2001, in the participating
countries.
During 2001, all the business processes for all the euroland companies were
converted successfully to the euro; all transactions are now denominated in
the euro as the base currency, and records are maintained in euros. The
company anticipates that the complete conversion activity, including residual
activities in 2002, will cost approximately $30 million.
The Europe and Middle East area contributed 25 percent of consolidated sales
and 21 percent of consolidated operating income (excluding non-recurring
items) in 2001. The participating countries accounted for 68 percent of the
company's sales in the Europe and Middle East area in 2001. The company
believes that the euro will, over time, increase price competition for the
company's products across Europe due to cross-border price transparency. The
company also believes that the adverse effects of increased price competition
will be offset somewhat by new business opportunities and efficiencies. The
company, however, is not able to estimate the net long-term impact of the euro
introduction on the company.
The euro introduction has not had a material impact on the company's overall
currency risk. The company anticipates the euro will simplify financial issues
related to cross-border trade in the European Union and reduce the transaction
costs and administrative time necessary to manage this trade and related
risks. The company believes that the associated savings will not be material
to corporate results.
30
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements may be identified by the use of words like "plan," "expect," "aim,"
"believe," "project," "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 more than half of its revenues
from outside the United States. The company's business may be affected by
factors in the United States and other countries that are beyond its control,
such as downturns in economic activity in a specific country or region;
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 may affect
the company's ability to realize projected growth rates in its sales and net
earnings and its results of operations. Because the company derives more than
half its revenues from 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.
* The company's growth objectives are largely dependent on the timing and
market acceptance of its new product offerings, including 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.
* The company's future results are subject to fluctuations in the costs of
purchased components and materials due to market demand, currency exchange
risks, shortages and other factors. The company depends on various components
and materials for the manufacturing of its products. Although the company has
not experienced any difficulty in obtaining components and materials, it is
possible that any of its supplier relationships could be terminated in the
future. Any sustained interruption in the company's receipt of adequate
supplies could have a material adverse effect on the company. In addition,
while the company has a process to minimize volatility in component and
material pricing, no assurance can be given that the company will be able to
successfully manage price fluctuations due to market demand, currency risks,
or shortages, or that future price fluctuations will not have a material
adverse effect on the company.
* The possibility that acquisitions, divestitures and strategic alliances may
not meet sales and/or profit expectations. As part of the company's strategy
for growth, the company has made and may continue to make acquisitions,
31
divestitures and strategic alliances. However, there can be no assurance that
these will be completed or beneficial to the company.
* The company is the subject of various legal proceedings. The current
estimates of the potential impact on the company's consolidated financial
position, results of operations and cash flows for its legal proceedings and
claims are predictions made by the company about the future and should be
considered forward-looking statements. These estimates could change in the
future. For a more detailed discussion of the legal proceedings involving the
company, see the discussion of "Legal Proceedings" in Part I, Item 3 of this
Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The company discusses risk management in various places throughout this
document, including discussions in Item 7 concerning Financial Condition and
Liquidity, and Financial Instruments, and in the Notes to Consolidated
Financial Statements (Debt, Other Financial Instruments, and the Derivatives
and Hedging Activities accounting policy. All derivative activity is governed
by written policies, and a value-at-risk analysis is provided for these
derivatives. The company does not have leveraged derivative positions.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Reference (pages)
Form 10-K
Report of Independent Auditors ............................. 32
Consolidated Statement of Income for the years ended
December 31, 2001, 2000 and 1999 ......................... 33
Consolidated Balance Sheet at December 31, 2001 and
2000 ..................................................... 34
Consolidated Statement of Changes in Stockholders'
Equity and Comprehensive Income for the years ended
December 31, 2001, 2000 and 1999.......................... 35
Consolidated Statement of Cash Flows
for the years ended December 31,
2001, 2000 and 1999 ...................................... 36
Notes to Consolidated Financial Statements ................. 37-62
32
Report of Independent Auditors
To the Stockholders and Board of Directors of Minnesota Mining and
Manufacturing Company:
In our opinion, the consolidated financial statements listed in Item 8 of this
Form 10-K present fairly, in all material respects, the consolidated financial
position of Minnesota Mining and Manufacturing Company and Subsidiaries at
December 31, 2001 and 2000, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 11, 2002
33
Consolidated Statement of Income
Minnesota Mining and Manufacturing Company and Subsidiaries
Years ended December 31
(Amounts in millions, except per-share amounts) 2001 2000 1999
Net sales $16,079 $16,724 $15,748
Operating expenses
Cost of sales 8,749 8,787 8,126
Selling, general and administrative expenses 4,061 3,963 3,712
Research, development and related expenses 1,084 1,101 1,056
Other expense (income) (88) (185) (102)
Total 13,806 13,666 12,792
Operating income 2,273 3,058 2,956
Interest expense and income
Interest expense 124 111 109
Interest income (37) (27) (33)
Total 87 84 76
Income before income taxes, minority interest
and cumulative effect of accounting change 2,186 2,974 2,880
Provision for income taxes 702 1,025 1,032
Minority interest 54 92 85
Income before cumulative effect of accounting change 1,430 1,857 1,763
Cumulative effect of accounting change -- (75) --
Net income $ 1,430 $ 1,782 $ 1,763
Weighted average common shares outstanding - basic 394.3 395.7 402.0
Earnings per share - basic
Income before cumulative effect of accounting change $ 3.63 $ 4.69 $ 4.39
Cumulative effect of accounting change -- (.19) --
Net income $ 3.63 $ 4.50 $ 4.39
Weighted average common shares outstanding - diluted 399.9 399.9 406.5
Earnings per share - diluted
Income before cumulative effect of accounting change $ 3.58 $ 4.64 $ 4.34
Cumulative effect of accounting change -- (.19) --
Net income $ 3.58 $ 4.45 $ 4.34
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
34
Consolidated Balance Sheet
Minnesota Mining and Manufacturing Company and Subsidiaries
At December 31
(Dollars in millions) 2001 2000
Assets
Current assets
Cash and cash equivalents $ 616 $ 302
Accounts receivable - net 2,482 2,891
Inventories 2,091 2,312
Other current assets 1,107 874
Total current assets 6,296 6,379
Investments 275 310
Property, plant and equipment - net 5,615 5,823
Other assets 2,420 2,010
Total assets $14,606 $14,522
Liabilities and Stockholders' Equity
Current liabilities
Short-term debt $ 1,373 $ 1,866
Accounts payable 753 932
Payroll 539 382
Income taxes 596 462
Other current liabilities 1,248 1,112
Total current liabilities 4,509 4,754
Long-term debt 1,520 971
Other liabilities 2,491 2,266
Total liabilities 8,520 7,991
Stockholders' equity
Common stock, par value $.01 per share 5 5
Shares outstanding - 2001: 391,303,636
2000: 396,085,348
Capital in excess of par value 291 291
Retained earnings 11,914 11,517
Treasury stock (4,633) (4,065)
Unearned compensation (286) (303)
Accumulated other comprehensive income (loss) (1,205) (914)
Stockholders' equity - net 6,086 6,531
Total liabilities and stockholder's equity $14,606 $14,522
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
35
Consolidated Statement of Changes in
Stockholders' Equity and Comprehensive Income
Minnesota Mining and Manufacturing Company and Subsidiaries
Accumulated
Common Other
Stock and Compre-
Capital in Unearned hensive
(Dollars in millions, Excess Retained Treasury Compen- Income
except per-share amounts) Total of Par Earnings Stock sation (Loss)
Balance at December 31, 1998 $5,936 $296 $ 9,980 $(3,482) $(350) $(508)
Net income 1,763 1,763
Cumulative translation adjustment - net
of $2 million tax benefit (176) (176)
Minimum pension liability adjustment - net
of $36 million tax benefit (30) (30)
Debt and equity securities, unrealized
gain - net of $77 million tax provision 126 126
Total comprehensive income 1,683
Dividends paid ($2.24 per share) (901) (901)
Amortization of unearned compensation 23 23
Reacquired stock (9.0 million shares) (825) (825)
Issuances pursuant to stock option
and benefit plans (5.7 million shares) 373 (101) 474
Balance at December 31, 1999 $6,289 $296 $10,741 $(3,833) $(327) $(588)
Net income 1,782 1,782
Cumulative translation adjustment - net
of $5 million tax provision (191) (191)
Minimum pension liability adjustment - net
of $37 million tax benefit (28) (28)
Debt and equity securities, unrealized
loss - net of $65 million tax benefit (107) (107)
Total comprehensive income 1,456
Dividends paid ($2.32 per share) (918) (918)
Amortization of unearned compensation 24 24
Reacquired stock (9.1 million shares) (814) (814)
Issuances pursuant to stock option
and benefit plans (6.3 million shares) 483 (88) 571
Issuances pursuant to acquisitions
(129 thousand shares) 11 11
Balance at December 31, 2000 $6,531 $296 $11,517 $(4,065) $(303) $(914)
Net income 1,430 1,430
Cumulative translation adjustment - net
of $14 million tax provision (267) (267)
Minimum pension liability adjustment - net
of $15 million tax benefit (16) (16)
Debt and equity securities, unrealized
loss - net of $11 million tax benefit (17) (17)
Derivative financial instruments - unrealized
gain - net of $5 million tax provision 9 9
Total comprehensive income 1,139
Dividends paid ($2.40 per share) (948) (948)
Amortization of unearned compensation 17 17
Reacquired stock (12.0 million shares) (1,322) (1,322)
Issuances pursuant to stock option
and benefit plans (6.1 million shares) 543 (85) 628
Issuances pursuant to acquisitions, net
of returns of $1 million from escrow
(net 1.1 million shares issued) 126 126
Balance at December 31, 2001 $6,086 $296 $11,914 $(4,633) $(286) $(1,205)
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
36
Consolidated Statement of Cash Flows
Minnesota Mining and Manufacturing Company and Subsidiaries
Years ended December 31 2001 2000 1999
(Dollars in millions)
Cash Flows from Operating Activities
Net income $ 1,430 $1,782 $1,763
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 1,089 1,025 900
Deferred income tax provision 1 89 95
Changes in assets and liabilities
Accounts receivable 345 (171) (186)
Inventories 194 (261) 96
Other current assets (97) (69) (11)
Other assets - net of amortization (13) (145) 119
Income taxes payable 148 27 196
Accounts payable and other current liabilities (62) 65 (63)
Other liabilities (27) (92) 173
Other - net 70 76 (1)
Net cash provided by operating activities 3,078 2,326 3,081
Cash Flows from Investing Activities
Purchases of property, plant and equipment (980) (1,115) (1,050)
Proceeds from sale of property, plant and equipment 102 104 108
Acquisitions of businesses (218) (472) (374)
Proceeds from sale of businesses 11 1 249
Purchases of investments (12) (12) (56)
Proceeds from sale of investments 47 121 9
Net cash used in investing activities (1,050) (1,373) (1,114)
Cash Flows from Financing Activities
Change in short-term debt - net (20) (236) (164)
Repayment of debt (maturities greater than 90 days) (1,564) (23) (179)
Proceeds from debt (maturities greater than 90 days) 1,693 495 2
Purchases of treasury stock (1,322) (814) (825)
Reissuances of treasury stock 462 425 347
Dividends paid to stockholders (948) (918) (901)
Distributions to minority interests (17) (60) (51)
Net cash used in financing activities (1,716) (1,131) (1,771)
Effect of exchange rate changes on cash 2 93 (20)
Net increase (decrease) in cash and cash equivalents 314 (85) 176
Cash and cash equivalents at beginning of year 302 387 211
Cash and cash equivalents at end of year $ 616 $ 302 $ 387
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
37
Notes to Consolidated Financial Statements
Significant Accounting Policies
Consolidation: All significant subsidiaries are consolidated. All significant
intercompany transactions are eliminated. As used herein, the term "3M" or
"company" refers to Minnesota Mining and Manufacturing Company and
subsidiaries unless the context indicates otherwise.
Foreign currency translation: Local currencies generally are considered the
functional currencies outside the United States, except in countries treated
as highly inflationary. Assets and liabilities for operations in local-
currency environments are translated at year-end exchange rates. Income and
expense items are translated at average rates of exchange prevailing during
the year. Cumulative translation adjustments are recorded as a component of
accumulated other comprehensive income in stockholders' equity.
For operations in countries treated as highly inflationary, certain financial
statement amounts are translated at historical exchange rates, with all other
assets and liabilities translated at year-end exchange rates. These
translation adjustments are reflected in income and are not material.
Reclassifications: Certain prior period balance sheet amounts have been
reclassified to conform with the current year presentation.
Use of estimates: The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Cash and cash equivalents: Cash and cash equivalents consist of cash and
temporary investments with maturities of three months or less when purchased.
Investments: Investments primarily include the cash surrender value of life
insurance policies and real estate and venture capital investments. Unrealized
gains and losses relating to investments classified as available-for-sale are
recorded as a component of accumulated other comprehensive income in
stockholders' equity.
Inventories: Inventories are stated at lower of cost or market, with cost
generally determined on a first-in, first-out basis.
Property, plant and equipment: Property, plant and equipment are recorded at
cost, including capitalized interest and internal engineering cost.
Depreciation of property, plant and equipment generally is computed using the
straight-line method based on estimated useful lives of the assets. Buildings
and improvements estimated useful lives primarily range from 10 to 40 years,
with the majority in the 20- to 40-year range. Machinery and equipment
estimated useful lives primarily range from 3 to 15 years, with the majority
in the 5- to 10-year range. Fully depreciated assets are retained in property
and accumulated depreciation accounts until removed from service. Upon
disposal, assets and related accumulated depreciation are removed from the
accounts and the net amount, less proceeds from disposal, is charged or
credited to operations.
Other assets: Goodwill is amortized on a straight-line basis over the periods
benefited, ranging from 5 to 40 years Other intangible assets are amortized
on a straight-line basis over their estimated economic lives. Refer to "New
accounting pronouncements" that follows for information about the cessation of
38
goodwill and other indefinite-lived intangible asset amortization effective
January 1, 2002.
Impairment of long-lived assets: Long-lived assets, including identifiable
intangibles and goodwill, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss would be recognized when the carrying
amount of an asset exceeds the estimated undiscounted future cash flows
expected to result from the use of the asset and its eventual disposition.
The amount of the impairment loss to be recorded is calculated by the excess
of the assets carrying value over its fair value. Fair value is determined
using a discounted cash flow analysis.
Revenue recognition: Revenue is recognized when the risks and rewards of
ownership have substantively transferred to customers, regardless of whether
legal title has transferred. This condition is normally met when the product
has been delivered or upon performance of services. The company sells a wide
range of products to a diversified base of customers around the world and,
therefore, believes there is no material concentration of credit risk. Prior
to 2000, the company recognized revenue upon shipment of goods to customers
and upon performance of services (refer to "Cumulative Effect of Accounting
Change" that follows).
Advertising and merchandising: These costs are charged to operations in the
year incurred.
Internal-use software: The company capitalizes direct costs of materials and
services used in the development of internal-use software. Amounts
capitalized are amortized on a straight-line basis over a period of 3 to 5
years and are reported as a component of machinery and equipment within
property, plant and equipment.
Environmental: Environmental expenditures relating to existing conditions
caused by past operations that do not contribute to current or future revenues
are expensed. Liabilities for remediation costs are recorded on an
undiscounted basis when they are probable and reasonably estimable, generally
no later than the completion of feasibility studies or the company's
commitment to a plan of action.
Accounting for stock-based compensation: The company uses the intrinsic value
method for its Management Stock Ownership Program (MSOP). The General
Employees' Stock Purchase Plan is considered non-compensatory.
Comprehensive income: Total comprehensive income and the components of
accumulated other comprehensive income are presented in the Consolidated
Statement of Changes in Stockholders' Equity and Comprehensive Income.
Accumulated other comprehensive income is composed of foreign currency
translation effects (including hedges of net investments in international
companies), minimum pension liability adjustments, unrealized gains and losses
on available-for-sale debt and equity securities, and unrealized gains and
losses on cash flow hedging instruments.
Earnings per share: The difference in the weighted average shares outstanding
for calculating basic and diluted earnings per share is attributable to the
dilution associated with the company's stock-based compensation plans.
Derivatives and hedging activities: Effective January 1, 2001, the company
adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138.
This new accounting standard requires that all derivative instruments be
recorded on the balance sheet at fair value and establishes criteria for
designation and
39
effectiveness of hedging relationships. The effect of adopting this standard
was not material to the company's consolidated financial statements.
The company uses interest rate swaps, currency swaps, and forward and option
contracts to manage risks generally associated with foreign exchange rate,
interest rate and commodity market volatility. All hedging instruments are
designated and effective as hedges, in accordance with U.S. generally accepted
accounting principles. If the underlying hedged transaction ceases to exist,
all changes in fair value of the related derivatives that have not been
settled are recognized in current earnings. Instruments that do not qualify
for hedge accounting are marked to market with changes recognized in current
earnings. The company does not hold or issue derivative financial instruments
for trading purposes and is not a party to leveraged derivatives.
New accounting pronouncements: In June 2001, the Financial Accounting
Standards Board issued SFAS No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets." The most significant changes made by
SFAS No. 141 are: 1) requiring that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001, and 2)
establishing specific criteria for the recognition of intangible assets
separately from goodwill.
SFAS No. 142 primarily addresses the accounting for acquired goodwill and
intangible assets (i.e., the post-acquisition accounting). The provisions of
SFAS No. 142 will be effective for fiscal years beginning after December 15,
2001. The most significant changes made by SFAS No. 142 are: 1) goodwill and
indefinite-lived intangible assets will no longer be amortized; 2) goodwill
and indefinite-lived intangible assets will be tested for impairment at least
annually (a preliminary review indicated that no impairment existed at
December 31, 2001); and 3) the amortization period of intangible assets with
finite lives will no longer be limited to 40 years.
SFAS No. 141 applies to all business combinations with a closing date after
June 30, 2001. SFAS No. 142 will be adopted effective January 1, 2002.
Goodwill and intangible assets acquired after June 30, 2001, are subject
immediately to the non-amortization and amortization provisions of this
statement. These standards permit only prospective application of the new
accounting; accordingly, adoption of these standards will not affect
previously reported 3M financial information. The principal effect of SFAS
No. 142 will be the elimination of goodwill amortization. Amortization of
goodwill and indefinite-lived intangible assets in 2001 was $67 million (net
income impact of $51 million, or 12 cents per diluted share).
In June 2001, the Financial Accounting Standards Board also issued Statement
of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations", which must be adopted no later than January 1, 2003.
This statement establishes accounting standards for recognition and
measurement of a liability for an asset retirement obligation and the
associated asset retirement cost. 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.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", which will
be adopted by the company on January 1, 2002. The company does not expect
this standard to have a material impact on its consolidated financial
statements. This standard broadens the presentation of discontinued
operations to include more disposal transactions, thus the recognition of
discontinued operations is expected to become more common under this new
standard.
40
The company will adopt Emerging Issues Task Force Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products", effective January 1, 2002. This statement addresses
whether certain consideration from a vendor to a reseller of the vendor's
products is an adjustment to selling prices or a cost. It is estimated that
this statement will result in Consumer and Office segment annual net sales and
advertising cost (included in selling, general and administrative expenses)
being reduced by approximately $25 million annually for years 1999 through
2001. This statement would have no effect on the company's net income or its
financial position.
Cumulative Effect of Accounting Change
During the fourth quarter of 2000, the company changed its revenue
recognition policies. Essentially, the new policies recognize that the risks
and rewards of ownership in many transactions do not substantively transfer
to customers until the product has been delivered, regardless of whether
legal title has transferred. In addition to this change in accounting that
affected a substantial portion of its product sales, the company has revised
aspects of its accounting for services provided in several of its smaller
businesses. These new policies are consistent with the guidance contained in
SEC Staff Accounting Bulletin No. 101. The effect of these changes in
revenue recognition policies, as of January 1, 2000, is reported as the
cumulative effect of an accounting change in 2000. This change did not have a
significant effect on previously reported 2000 quarters or on prior years.
Restructuring Charges and Other Non-recurring Items
During the first half of 2001, the company developed and announced a
restructuring plan that consolidates certain operations and streamlines the
organization to increase speed and productivity. In June 2001, the company
completed the identification of all significant actions to be taken and
obtained final approvals from the appropriate level of management. In the
fourth quarter of 2001, the company obtained approvals for certain additional
actions. In 2001 the company recorded charges of $569 million ($353 million
after tax and minority interest), principally related to the restructuring
plan. These charges were classified as a component of cost of sales ($249
million); selling, general and administrative expenses ($300 million); and
research, development and related expenses ($20 million). Of the total
charges, $472 million related to employee severance and benefits, $80 million
related to accelerated depreciation (incremental charges resulting from
shortened depreciable lives, primarily related to downsizing or consolidating
manufacturing operations), and $17 million related to other exit activities.
The accelerated depreciation (related to assets included in property, plant and
equipment) primarily involved specialized 3M manufacturing machinery and
equipment. Estimated salvage values were based on estimates of proceeds upon
sale of certain affected assets. The charges related to other exit activities
include incremental costs and contractual obligations for items such as lease
termination payments and other facility exit costs incurred as a direct result
of this plan.
In connection with its restructuring plan, the company expects to eliminate a
total of about 6,000 positions, with most of these reductions occurring by
June 30, 2002. Through December 31, 2001, the company had eliminated about
3,500 positions. These positions represent a wide range of functions
throughout the company. Of the 6,000 employment reduction for the total plan,
about 40 percent will occur in the United States, 35 percent in Europe, and
the balance in other international areas. All business segments were impacted
directly and also indirectly through reduced allocations of corporate staff
service costs. Employee severance and benefit charges totaling $472 million
were taken during 2001. These charges were taken in the quarter when
management approved the plans and after severance benefits had been
communicated to the employees.
41
Of the company's remaining current liability at December 31, 2001, $185 million
is classified in current liabilities (payroll) and $13 million is classified in
other current liabilities on the Consolidated Balance Sheet. The company
classified $124 million of the current year's charges as long-term liabilities.
Special termination pension and medical benefits, aggregating $62 million, were
offered to eligible employees. These benefits will generally be paid over their
life expectancies. In addition, the company estimates that $62 million of
deferred separation pay will be paid in 2003 and beyond. The company also
recorded $8 million of non-cash stock option expense due to the
reclassification of certain employees age 50 and older to retiree status,
resulting in a modification of their original stock option awards for
accounting purposes. The current liabilities and a portion of the non-current
liabilities will be funded through cash provided by operations, with additional
funding for non-current liabilities provided through established pension and
postretirement trust funds.
The restructuring plan includes actions in 25 locations in the United States,
27 in Europe, eight in the Asia Pacific area, 13 in Latin America, and four in
Canada. Substantially all actions required by the plan are expected to be
completed by June 30, 2002. The company has not discontinued any major product
lines as a result of the restructuring plan. The restructuring charges do not
include any write-down of goodwill or other intangible assets.
Selected information related to these 2001 charges follows.
Employee
Severance
and Accelerated
(Millions) Benefits Depreciation Other Total
-------- ------------ ------ ------
2001 charges
Second quarter $386 $-- $11 $397
Third quarter 27 39 3 69
Fourth quarter 59 41 3 103
---- ---- ---- ----
Total charges $472 $80 $17 $569
Cash payments (155) (4) (159)
Non-cash (8) (80) -- (88)
Long-term portion
of liability (124) -- (124)
Current liability at
December 31, 2001 $185 $13 $198
==== ==== ====
42
Selected information related to the company's 1998 restructuring program follows.
Employee Write-down
Severance of Property,
and Plant and
(Millions) Benefits Equipment Other Total
-------- ------------ ------- ---------
1998 charges $271 $143 $79 $493
1999 changes in estimates 4 (31) (1) (28)
Total charges $275 $112 $78 $465
December 31, 1998 liability $232 $32 $264
1999 cash payments (205) (23) (228)
1999 changes in estimates 4 (1) 3
December 31, 1999 liability $ 31 $ 8 $ 39
2000 cash payments (24) (4) (28)
December 31, 2000 liability $ 7 $ 4 $ 11
2001 cash payments (3) (2) (5)
December 31, 2001 liability $ 4 $ 2 $ 6
Acquisitions and Divestitures
General: In 2001, 2000 and 1999, all business combinations completed by the
company used the purchase method of accounting. Effective January 1, 2002,
with the adoption of SFAS No. 142, goodwill and indefinite-lived intangibles
will no longer be amortized.
Year 2001 acquisitions: In 2001, the company completed three notable business
combinations, all in the first quarter of the year. 3M acquired MicroTouch
Systems, Inc., a touch screen manufacturer, for $158 million in cash, net of
cash acquired. 3M also acquired Robinson Nugent, Inc., a telecommunications
supplier, in exchange for 1,124,135 shares of 3M common stock that had a fair
market value of $127 million as of the acquisition date. 3M also combined its
German dental business (3M Inter-Unitek GmbH, an existing 3M subsidiary) with
ESPE Dental AG, a dental products manufacturer. 3M Inter-Unitek GmbH acquired
100 percent of the outstanding shares of ESPE Dental AG in exchange for 43
percent ownership in 3M Inter-Unitek GmbH and $25 million, net of cash
acquired. Upon completion of this transaction, 3M holds a 57 percent
controlling interest in 3M Inter-Unitek GmbH and consolidates it with a
provision for the minority interest that does not have participating rights.
3M entered into put/call option agreements with former shareholders of ESPE
Dental AG. Under the put agreements, 3M would be required to purchase the
43 percent minority interest in 3M Inter-Unitek GmbH from former shareholders
of ESPE Dental AG for cash of approximately $266 million. These put options
became exercisable on the acquisition date and expire on January 10, 2003.
The call options, if exercised, would require the minority shareholders to
sell their 3M Inter-Unitek GmbH shares to 3M, based upon a formula set forth in
the agreement. These call options become exercisable on December 20, 2003, and
expire on June 30, 2004.
The 2001 purchased intangible assets, including goodwill, through December 31,
2001, are being amortized on a straight-line basis over the periods benefited,
ranging from 4 to 40 years. In-process research and development charges
associated with these acquisitions were not material. Pro forma information
related to these acquisitions is not provided because the impact of these
acquisitions on the company's consolidated results of operations is not
considered to be significant.
43
Consolidated balance sheet purchase price allocations: The purchase price
allocations and the resulting impact on the consolidated balance sheet relating
to all 2001 business combinations, including five small acquisitions not
discussed previously, are summarized in the following table. The impact on the
consolidated balance sheet for 2000 and 1999 acquisitions (discussed later) are
also summarized in the table that follows.
Asset (Liability)
(Millions)
2001 2000 1999
----- ----- -----
Accounts receivable $ 67 $ 86 $ 5
Inventories 64 112 8
Other current assets 19 13 6
Property, plant and equipment 110 179 14
Purchased intangible assets 473 326 254
Other assets 23 30 15
Accounts payable and
other current liabilities (138) (93) --
Interest bearing debt (16) (123) --
Minority interest liability (243) -- 72
Other long-term liabilities (14) (47) --
----- ----- -----
Net assets acquired $345 $483 $374
===== ===== =====
Cash, net of cash acquired $218 $472 $374
Non-cash (3M shares at
fair value) 127 11 --
----- ----- -----
Net assets acquired $345 $483 $374
===== ===== =====
Year 2000 acquisitions: During 2000, 3M acquired 91 percent (subsequently
increased to 93 percent), of Quante AG (a telecommunications supplier), 100
percent of the multi-layer integrated circuit packaging line of W.L. Gore and
Associates, and seven smaller businesses for a total purchase price of $472
million in cash (net of cash acquired) plus 128,994 shares of 3M common stock.
The stock had a fair market value of $11 million at the acquisition date and
was previously held as 3M treasury stock.
The 2000 purchased intangible assets, including goodwill, through December 31,
2001, are being amortized on a straight-line basis over the periods benefited,
ranging from 3 to 20 years. In-process research and development charges
associated with these acquisitions were not significant. Pro forma information
related to these acquisitions is not included because the impact of these
acquisitions on the company's consolidated results of operations is not
considered to be significant.
Year 1999 acquisition: During 1999, 3M had one notable acquisition and
acquired seven smaller businesses. In December 1999, 3M finalized the
acquisition of the outstanding 46 percent minority interest in Dyneon LLC from
Celanese AG for approximately $340 million in cash, primarily financed by debt.
The purchase price exceeded the fair value of the minority interest net assets
by approximately $267 million, of which approximately $242 million represents
goodwill and other intangible assets that will be amortized over 20 years or
less. If this acquisition had occurred at the beginning of 1999, the effect on
consolidated results of operations would not have been significant.
44
Year 1999 divestitures: On June 30, 1999, the company closed the sale of
Eastern Heights Bank, a subsidiary banking operation, and the sale of the
assets of its cardiovascular systems business. These divestitures generated
cash proceeds of $203 million and resulted in a pre-tax gain of $118 million
($69 million after tax) in the second quarter of 1999. 3M also recorded a
pre-tax gain of $32 million ($20 million after tax) related to divestitures,
mainly in the Health Care segment, in the third quarter of 1999. These pre-tax
gains are recorded in the other expense (income) line within operating income.
The primary impact of these divestitures on the 1999 Consolidated Balance Sheet
was to reduce investments by about $350 million and decrease current and other
liabilities by a similar amount.
Supplemental Statement of Income Information
(Millions) 2001 2000 1999
Research, development and related expenses $1,084 $1,101 $1,056
Advertising and merchandising costs 432 544 484
Research and development expenses, covering basic scientific research and the
application of scientific advances to the development of new and improved
products and their uses, totaled $745 million, $727 million and $688 million
in 2001, 2000 and 1999, respectively. Related expenses primarily include
technical support provided by the laboratories for existing products.
Supplemental Balance Sheet Information
(Millions) 2001 2000
Accounts receivable
Accounts receivable $ 2,569 $ 2,975
Less allowances 87 84
Accounts receivable - net $ 2,482 $ 2,891
Inventories
Finished goods $ 1,103 $ 1,231
Work in process 611 663
Raw materials 377 418
Total inventories $ 2,091 $ 2,312
Other current assets
Product and other insurance receivables $ 304 $ 267
Deferred income taxes 290 152
Other 513 455
Total other current assets $ 1,107 $ 874
Investments
Available-for-sale (fair value) $ 37 $ 72
Other (cost, which approximates fair value) 238 238
Total investments $ 275 $ 310
45
TABLE
Supplemental Balance Sheet Information (continued)
(Millions) 2001 2000
Property, plant and equipment - at cost
Land $ 224 $ 249
Buildings and leasehold improvements 3,510 3,477
Machinery and equipment 10,208 9,958
Construction in progress 423 486
14,365 14,170
Less accumulated depreciation 8,750 8,347
Property, plant and equipment - net $ 5,615 $ 5,823
Other assets
Goodwill $ 984 $ 647
Patents 141 141
Tradenames 52 34
Other intangible assets 36 35
Prepaid pension benefits 537 412
Product and other insurance receivables 481 566
Deferred income taxes 152 143
Other 37 32
Total other assets $ 2,420 $ 2,010
Other current liabilities
Employee benefits and withholdings $ 295 $ 237
Accrued trade payables 267 277
Deferred income 188 132
Property and other taxes 153 137
Product and other claims 119 107
Deferred income taxes 16 8
Other 210 214
Total other current liabilities $ 1,248 $ 1,112
Other liabilities
Non-funded pension and postretirement benefits $ 633 $ 754
Minority interest in subsidiaries 527 346
Deferred income taxes 469 362
Employee benefits 355 289
Product and other claims 335 339
Deferred income 94 12
Other 78 164
Total other liabilities $ 2,491 $ 2,266
At December 31, 2001 and 2000, respectively, product and other insurance
receivables (current and long-term) include $406 million and $519 million
related to the breast implant matter, $223 million and $155 million related to
respirator/mask/asbestos litigation, and $156 million and $159 million of
other insurance receivables. Although at December 31, 2001, receivables for
insurance recoveries related to the breast implant matter of $324 million
continue to be contested by insurance carriers, management, based on the
opinion of counsel, believes such amounts will ultimately be collected.
Accounts payable included drafts payable on demand of $83 million at December
31, 2001, and $109 million at December 31, 2000.
46
Supplemental Stockholders' Equity and Comprehensive Income Information
Common stock ($.01 par value per share; $.50 par value at December 31, 1999)
of 1.5 billion shares is authorized (1 billion shares at December 31, 1999),
with 472,016,528 shares issued in 2001, 2000 and 1999. Common stock and
capital in excess of par includes $231 million transferred from common stock
to capital in excess of par value during 2000 in connection with the change in
par value of the company's common stock from $.50 to $.01 per share. Preferred
stock, without par value, of 10 million shares is authorized but unissued.
The following table shows the ending balances of the components of accumulated
other comprehensive income (loss).
Accumulated Other Comprehensive Income (Loss)
(Millions) 2001 2000 1999
Cumulative translation - net $(1,152) $(885) $(694)
Minimum pension liability adjustments - net (74) (58) (30)
Debt and equity securities, unrealized gain - net 12 29 136
Cash flow hedging instruments, unrealized gain - net 9 -- --
Total accumulated other comprehensive income (loss) $(1,205) $(914) $(588)
Reclassification adjustments are made to avoid double counting in
comprehensive income items that are also displayed as part of net income. A
summary of these reclassification adjustments follows.
Reclassification Adjustments to Comprehensive Income
(Millions) 2001 2000 1999
Gains on sale or donation of equity securities,
net of tax provision of $9 million,
$39 million and $16 million, respectively,
for 2001, 2000 and 1999 $ 14 $ 62 $ 25
Write-down of equity securities, net of tax benefit
of $3 million (5) -- --
Cash flow hedging instruments, gains - net
of tax provision of $8 million 13 -- --
In 1999, the equity security gains related to appreciated equity securities
donated to the 3M Foundation. In 2001, 2000 and 1999, other reclassification
adjustments were not material. No tax provision has been made for the
translation of foreign currency financial statements into U.S. dollars.
Supplemental Cash Flow Information
(Millions) 2001 2000 1999
Cash income tax payments $ 520 $ 852 $ 653
Cash interest payments 137 104 114
Capitalized interest 26 31 26
Depreciation 916 915 822
Amortization of software 74 45 39
Amortization of goodwill and
indefinite-lived tradenames 67 44 24
Amortization of patents and
other identifiable intangibles 32 21 15
Individual amounts on the Consolidated Statement of Cash Flows exclude the
effects of acquisitions, divestitures and exchange rate impacts, which are
presented separately. In 2000, the net impact of cumulative effect of
accounting changes is recorded in "Other - net" within operating activities.
47
Non-cash transactions occurring during 2001 included:
*3M acquired Robinson Nugent, Inc. in exchange for shares of 3M common stock
that had a fair market value of $127 million.
*The company exchanged 43 percent ownership in 3M Inter-Unitek GmbH,
previously a wholly owned subsidiary, for 87 percent of ESPE Dental AG. The
value of this transaction is estimated at approximately $245 million.
*Dividends declared, but not paid at December 31, 2001, of $40 million were
payable to minority interests in consolidated subsidiaries.
In 1999, 3M exchanged assets used in the business, but not held for sale, with
a fair market value of $61 million plus cash of $12 million, for similar
assets having a fair market value of $73 million. No gain was recognized on
this nonmonetary exchange of productive assets. Also in 1999, 3M donated to
the 3M Foundation appreciated equity securities with a market value of $66
million, resulting in $8 million of pre-tax expense, which represented the
company's cost of the securities.
Debt
Short-Term Debt Effective
(Millions) Interest Rate* 2001 2000
U.S. dollar commercial paper 2.60% $ 731 $ 655
Non-U.S. dollar commercial paper 3.92% 145 --
5.6523% dealer remarketable securities 5.65% 350 352
Long-term debt - current portion 8.94% 5 616
Long-term debt - current portion - ESOP
debt guarantee 5.62% 32 30
Other borrowings 7.25% 110 213
Total short-term debt $1,373 $1,866
Long-Term Debt Currency/ Effective
Fixed vs. Interest Maturity
(Millions) Floating Rate* Date 2001 2000
U.S. dollar (USD) 6.375% note USD Fixed 6.38% 2028 $ 330 $ 330
ESOP debt guarantee USD Fixed 5.62% 2003-2009 271 303
4.25% medium-term note USD Floating 1.76% 2004 200 --
4.90% medium-term note USD Floating 1.87% 2004 150 --
Japanese Yen (JPY) 1% Eurobond JPY Fixed 1.00% 2003 122 139
4.57% medium-term note USD Fixed 4.57% 2003 100 --
Dec. 2041 floating rate note USD Floating 1.67% 2041 100 --
Sumitomo 3M Limited 0.795% note JPY Fixed 0.80% 2003 76 87
Other borrowings Various 2.25% 2003-2040 171 112
Total long-term debt $1,520 $ 971
Weighted-Average Effective Interest Rate*
Total Excluding ESOP debt
At December 31 2001 2000 2001 2000
Short-Term 3.98% 6.29% 3.94% 6.30%
Long-Term 3.60% 4.84% 3.15% 4.48%
*Reflects the effects of interest rate and currency swaps at December 31.
In December 2001, the company's dealer remarketable securities were remarketed
for one year. They were reissued with a fixed coupon rate of 5.6523 percent.
The remarketable securities can be remarketed annually, at the option of the
dealer, for a year each time, with a final maturity date of December 2010.
48
In October 2000, the company filed a shelf registration with the Securities
and Exchange Commission relating to the potential offering of debt securities
of up to $1.5 billion. After the shelf registration became effective, the
company in May 2001 established under the shelf a medium-term notes program
through which up to $1.4 billion of medium-term notes may be offered. As of
December 31, 2001, $550 million of medium-term notes had been issued under the
medium term note program and another $56 million of debt securities had been
issued directly from the shelf, aggregating $606 million debt securities
offered for 2001 under the shelf.
The ESOP debt is serviced by dividends on stock held by the ESOP and by
company contributions. These contributions are not reported as interest
expense, but are reported as an employee benefit expense in the Consolidated
Statement of Income. Other borrowings includes debt held by 3M's
international companies, and floating rate notes and industrial bond issues in
the United States, with the long-term portion of this debt primarily comprised
of U.S. Dollar floating rate debt.
Maturities of long-term debt for the next five years are: 2002, $37 million;
2003, $331 million; 2004, $385 million; 2005, $37 million; and 2006, $39
million.
At year-end 2001, available short-term lines of credit totaled about $658
million, of which $59 million was outstanding. An additional letter of credit
of $266 million is dedicated to the reacquisition of 3M Inter-Unitek shares
issued in connection with the ESPE Dental AG business combination, with the
shares subject to put options exercisable by former shareholders of ESPE
Dental AG from the date of acquisition until January 10, 2003. The company
also has uncommitted lines of credit totaling $125 million. Debt covenants do
not restrict the payment of dividends.
Other Financial Instruments
Foreign Currency Forward and Option Contracts: The company enters into
foreign exchange forward contracts, options and swaps to hedge against the
effect of exchange rate fluctuations on cash flows denominated in foreign
currencies and certain intercompany financing transactions. These transactions
are designated as cash flow hedges. At December 31, 2001, the company had
various open foreign exchange forward and option contracts, the majority of
which had maturities of one year or less. The amounts at risk are not material
because the company has the ability to generate offsetting foreign currency
cash flows.
For foreign currency cash flow hedges, the net realized gain recorded in cost
of sales for the year 2001 totaled $37 million, with the impact largely offset
by underlying hedged items. The settlement or extension of these derivatives
will result in reclassifications to earnings in the period during which the
hedged transactions affect earnings (from other comprehensive income). If
exchange rates are unchanged within the next 12 months, the company expects to
reclassify to after-tax earnings a majority of the $17 million of unrealized
net gains included in cash flow hedging instruments within other comprehensive
income at December 31, 2001, with the impact largely offset by underlying
hedged items. The maximum length of time over which 3M is hedging its exposure
to the variability in future cash flows for a majority of the forecasted
transactions, excluding those forecasted transactions related to the payment
of variable interest on existing financial instruments, is 12 months. No
foreign currency cash-flow hedges were discontinued during 2001. Hedge
ineffectiveness was not material for the year 2001.
49
Interest Rate & Currency Swaps: The company manages interest expense using a
mix of fixed and floating rate debt. To help manage borrowing costs, the
company may enter into interest rate swaps. Under these arrangements, the
company agrees to exchange, at specified intervals, the difference between
fixed and floating interest amounts calculated by reference to an agreed-upon
notional principal amount. The company uses interest rate and currency swaps
to manage interest rate risk related to borrowings.
At December 31, 2001, the company had interest rate swaps with a fair value of
$7 million designated as fair value hedges of underlying fixed rate
obligations. The mark-to-market of these fair value hedges is recorded as
gains or losses in interest expense and is offset by the gain or loss
on the underlying debt instrument that is also recorded in interest expense.
All existing fair value hedges are 100 percent effective and thus, there is no
impact to earnings due to hedge ineffectiveness.
From time to time, the company also uses cross-currency interest rate swaps to
hedge foreign currency and interest rates. There were no cross-currency
interest rate swaps outstanding at December 31, 2001.
Net Investment Hedging: From time to time, the company uses foreign currency
debt and forwards to hedge portions of the company's net investments in
foreign operations. For hedges that meet the effectiveness requirements, the
net gains or losses are recorded in cumulative translation within other
comprehensive income, with any ineffectiveness recorded in cost of sales. In
2001, an unrealized after-tax gain of $23 million was recorded in cumulative
translation. Hedge ineffectiveness resulted in after-tax realized gains
totaling $4 million in 2001.
Commodity Price Management: The company manages commodity price risks through
negotiated supply contracts, price protection swaps and forward physical
contracts. The company uses commodity price swaps as cash flow hedges of
forecasted transactions to manage price volatility. The related mark-to-
market gain or loss on qualifying hedges is included in other comprehensive
income to the extent effective (typically 100 percent effective), and
reclassified into cost of sales in the period during which the hedged
transaction affects earnings. For total year 2001, an unrealized after-tax
loss of $8 million was recorded in cash flow hedging instruments within other
comprehensive income, with the majority expected to be reclassified to
earnings beyond 12 months and expected to be largely offset by underlying
hedged items. 3M has hedged its exposure to the variability of future cash
flows for certain forecasted transactions through 2005. No commodity cash
flow hedges were discontinued during the 12 months ended December 31, 2001.
Credit risk: The company is exposed to credit loss in the event of
nonperformance by counterparties in interest rate swaps, currency swaps, and
option and foreign exchange contracts. However, the company's risk is limited
to the fair value of the instruments. The company actively monitors its
exposure to credit risk through the use of credit approvals and credit limits,
and by selecting major international banks and financial institutions as
counterparties. The company does not anticipate nonperformance by any of these
counterparties.
50
Fair value of financial instruments: At December 31, 2001 and 2000, the
company's financial instruments included cash and cash equivalents, accounts
receivable, investments, accounts payable, borrowing, and derivative
contracts. The fair values of cash and cash equivalents, accounts receivable,
accounts payable, and short-term debt (except the $350 million dealer
remarketable security) approximated carrying values because of the short-term
nature of these instruments. Available-for-sale investments and year-end 2001
derivative contracts are reported at fair values. Fair values for investments
held at cost are not readily available, but are believed to approximate fair
value. The carrying amounts and estimated fair values of other financial
instruments based on third-party quotes follow.
Financial Instruments Carrying Amounts and Estimated Fair Values
December 31, 2001 December 31, 2000
Carrying Fair Carrying Fair
(Millions) Amount Value Amount Value
Short-term debt - dealer
remarketable securities $ 350 $ 366 $352 $362
Long-term debt 1,520 1,494 971 950
51
Income Taxes
At December 31, 2001, about $3.3 billion of retained earnings attributable to
international companies were considered to be indefinitely invested. No
provision has been made for taxes that might be payable if these earnings were
remitted to the United States. It is not practical to determine the amount of
incremental taxes that might arise were these earnings to be remitted.
In 2000, the company recorded a cumulative effect of accounting change,
reducing earnings by $75 million net of tax. The provision for income taxes
excludes a $42 million tax benefit related to this cumulative effect.
Income before Income Taxes, Minority Interest
and Cumulative Effect of Accounting Change
(Millions) 2001 2000 1999
United States $1,368 $1,798 $2,020
International 818 1,176 860
Total $2,186 $2,974 $2,880
Provision for Income Taxes
(Millions) 2001 2000 1999
Currently payable
Federal $ 376 $ 471 $ 543
State 47 64 72
International 278 401 322
Deferred
Federal (7) 92 100
State 6 7 9
International 2 (10) (14)
Total $ 702 $1,025 $1,032
Components of Deferred Tax Assets
and Liabilities
(Millions) 2001 2000
Accruals currently not deductible
Employee benefit costs $225 $278
Product and other claims 173 170
Severance and other restructuring costs 73 --
Product and other insurance receivables (286) (308)
Accelerated depreciation (464) (436)
Other 236 221
Net deferred tax asset (liability) $(43) $(75)
Reconciliation of Effective Income Tax Rate 2001 2000 1999
Statutory U.S. tax rate 35.0% 35.0% 35.0%
State income taxes - net of federal benefit 1.6 1.6 1.8
International income taxes - net (.7) (.8) .2
Tax benefit of foreign sales corporation (2.2) (.9) (.9)
All other - net (1.6) (.4) (.3)
Effective worldwide tax rate 32.1% 34.5% 35.8%
52
Business Segments
3M's businesses are organized, managed and internally reported as six
operating segments based on differences in products, technologies and
services. These segments are Transportation, Graphics and Safety; Health
Care; Industrial; Consumer and Office; Electro and Communications; and
Specialty Material. These segments have worldwide responsibility for virtually
all of the company's product lines. 3M is not dependent on any single product
or market.
Transactions among reportable segments are recorded at cost. 3M is an
integrated enterprise characterized by substantial intersegment cooperation,
cost allocations and inventory transfers. Therefore, management does not
represent that these segments, if operated independently, would report the
operating income and other financial information shown. The allocations
resulting from the shared utilization of assets are not necessarily indicative
of the underlying activity for segment assets, depreciation and amortization,
and capital expenditures.
Operating income in 2001 included non-recurring charges of $504 million. Non-
recurring charges, principally related to the company's restructuring plan,
totaled $569 million (recorded in Corporate and Unallocated). Acquisition-
related costs totaled $23 million ($10 million recorded in Health Care; $7
million in Transportation, Graphics and Safety; and $6 million in Electro and
Communications). Additional items recorded in Corporate and Unallocated
included a reversal of a 1999 litigation accrual of $73 million, and a gain of
$15 million related to the net impact of the sale and write-down of available-
for-sale equity securities. Depreciation and amortization of $1.089 billion
included accelerated depreciation (shortened lives) related to the
restructuring of $80 million (recorded in Corporate and Unallocated).
Operating income in 2000 included a non-recurring net loss of $23 million.
Non-recurring costs included $168 million in the Specialty Material segment
related to the company's phase-out of perfluorooctanyl-based chemistry
products. This $168 million included $56 million of accelerated depreciation
(included in the Specialty Material segment depreciation and amortization),
$48 million of impairment losses, and severance and other costs. Other
non-recurring costs included a $20 million write-down of corporate and
unallocated assets, and $20 million of other non-recurring expenses ($13
million related to acquisitions in the Electro and Communications segment).
Non-recurring operating income gains in 2000 of $135 million were largely
related to corporate and unallocated asset dispositions, principally the sale
of available-for-sale equity securities. Operating income in 2000 also included
a $50 million gain from the termination of a product distribution agreement
in the Health Care segment.
Operating income in 1999 included a non-recurring net gain of $100 million.
This related to divestitures of certain health care businesses and Eastern
Heights Bank, litigation expense, an investment valuation adjustment, and a
change in estimate that reduced 1998 restructuring charges. Of this $100
million net gain, $62 million was recorded in Health Care and $38 million in
Corporate and Unallocated.
53
Business segments (continued):
Business Segment Products
Business Segment Major Products
Transportation, Graphics Reflective sheeting, commercial graphics
and Safety systems, respirators, automotive components,
safety and security products, and optical films
Health Care Medical and surgical supplies, skin
health and infection prevention products,
pharmaceuticals, drug delivery systems,
dental and orthondontic products,
health information systems, microbiology
products, and closures for disposable diapers
Industrial Tapes, coated and nonwoven abrasives, and
specialty adhesives
Consumer and Office Sponges, scouring pads, high performance cloths,
consumer and office tapes, repositionable notes,
carpet and fabric protectors, energy control
products, home improvement products, floor
matting and commercial cleaning products,
and visual systems
Electro and Communications Packaging and interconnection devices,
insulating and splicing solutions
for the electronics, telecommunications and
electrical industries
Specialty Material Specialty materials for automotive, electronics,
telecommunications, textile and other
industries, and roofing granules
54
Business segments (continued):
Business Segment Information Depr. Capital
Net Operating and Expendi-
(Millions) Sales Income Assets** Amort. tures
Transportation, 2001 $ 3,526 $ 695 $ 2,621 $ 238 $ 208
Graphics and Safety 2000 3,518 783 2,741 186 239
1999 3,234 675 2,673 140 199
Health Care 2001 3,419 760 2,264 193 179
2000 3,135 675 2,025 188 189
1999 3,138 680 2,076 203 189
Industrial 2001 3,199 518 2,134 185 191
2000 3,525 641 2,392 213 214
1999 3,409 612 2,357 220 202
Consumer and Office 2001 2,724 447 1,514 121 106
2000 2,848 434 1,711 101 134
1999 2,705 401 1,589 118 123
Electro and 2001 2,171 218 1,807 157 132
Communications 2000 2,467 404 1,961 158 208
1999 2,017 402 1,359 130 194
Specialty Material 2001 1,022 141 1,208 97 136
2000 1,197 57 1,230 144 131
1999 1,194 185 1,323 79 143
Corporate and 2001 18 (506) 3,058 98 28
Unallocated* 2000 34 64 2,462 35 --
1999 51 1 2,519 10 --
Total Company 2001 $16,079 $2,273 $14,606 $1,089 $ 980
2000 16,724 3,058 14,522 1,025 1,115
1999 15,748 2,956 13,896 900 1,050
*Corporate and Unallocated operating income principally includes corporate
investment gains and losses, certain derivative gains and losses, insurance-
related gains and losses, banking operating results (divested June 30, 1999),
certain litigation expenses, restructuring charges and other miscellaneous
items. Because this category includes a variety of miscellaneous items, it is
subject to fluctuation on a quarterly and annual basis.
**Segment assets primarily include accounts receivable; inventory; property,
plant and equipment - net; and other miscellaneous assets. Assets included
in Corporate and Unallocated principally are cash and cash equivalents;
insurance receivables; deferred income taxes; certain investments and other
assets; and certain unallocated property, plant and equipment.
55
Geographic Areas
Information in the table below is presented on the basis the company uses to
manage its businesses. Export sales and certain income and expense items are
reported within the geographic area where the final sales to customers are
made. Prior year amounts have been retroactively restated to conform to the
current-year presentation.
In 2001, operating income for eliminations and other includes non-recurring
net losses totaling $504 million, primarily related to the restructuring.
Also included were a reversal of a 1999 litigation accrual, acquisition
related costs, and a net gain on the sale and write-down of available-for-sale
equity securities. In 1999, operating income for eliminations and other
includes a $100 million non-recurring net benefit related to gains on
divestitures, litigation expense, an investment valuation adjustment, and a
change in estimate that reduced 1998 restructuring charges.
Geographic Area Information Latin
Europe America, Elimina-
and Africa tions
United Middle Asia and and Total
(Millions) States East Pacific Canada Other Company
Net sales to 2001 $7,546 $3,960 $3,043 $1,496 $ 34 $16,079
customers 2000 7,858 3,946 3,329 1,564 27 16,724
1999 7,559 3,808 2,887 1,467 27 15,748
Operating 2001 $1,028 $ 571 $ 807 $ 360 $ (493) $ 2,273
Income 2000 1,160 589 961 376 (28) 3,058
1999 1,198 574 768 348 68 2,956
Property, 2001 $3,675 $ 974 $ 634 $ 332 $ -- $ 5,615
plant and 2000 3,699 1,046 711 367 -- 5,823
equipment - 1999 3,647 1,017 757 355 -- 5,776
net
Pension and Postretirement Benefit Plans
3M has various company-sponsored retirement plans covering substantially all
U.S. employees and many employees outside the United States. Pension benefits
are based principally on an employee's years of service and compensation near
retirement. In addition to providing pension benefits, the company provides
certain postretirement health care and life insurance benefits for
substantially all of its U.S. employees who reach retirement age while
employed by the company. Most international employees and retirees are
covered by government health care programs. The cost of company-provided
health care plans for these international employees is not material.
The company's pension funding policy is to deposit with independent trustees
amounts at least equal to accrued liabilities, to the extent allowed by law.
Trust funds and deposits with insurance companies are maintained to provide
pension benefits to plan participants and their beneficiaries. In addition,
the company has set aside funds for its U.S. postretirement plan with an
independent trustee and makes periodic contributions to the plan.
During 2001, the company adopted a change in the measurement date of its U.S.
employee benefit plans (qualified and nonqualified pension benefit plans and
its U.S. postretirement benefit plan) from December 31 to September 30.
Information presented in the tables for 2001 reflects a measurement date of
September 30, 2001, and December 31 for prior periods. This change did not
have a material impact on the determination of periodic pension cost or
pension obligations. Management believes this change is preferable to the
method previously employed, as it facilitates the benefit cost planning and
forecasting process.
56
The company's U.S. non-qualified pension plan had an unfunded accumulated
benefit obligation of $196 million at September 30, 2001, and $187 million at
December 31, 2000. There are no plan assets in the non-qualified plan due to
its nature.
Certain international pension plans were underfunded as of year-end 2001 and
2000. The accumulated benefit obligations of these plans were $534 million in
2001 and $499 million in 2000. The assets of these plans were $287 million in
2001 and $300 million in 2000. The net underfunded amounts are included in
current and other liabilities on the Consolidated Balance Sheet.
Benefit Plan Information Qualified and Non-qualified Postretirement
Pension Benefits Benefits
United States International
(Millions) 2001 2000 2001 2000 2001 2000
Reconciliation of benefit obligation
Beginning balance $5,905 $5,597 $2,368 $2,234 $1,166 $1,016
Service cost 123 125 91 83 39 39
Interest cost 449 416 118 98 90 82
Participant contributions - - 8 6 10 11
Foreign exchange rate changes - - 23 (199) - -
Plan amendments 1 1 7 - 1 -
Actuarial(gain)loss 305 117 (90) 199 74 109
Benefit payments (279) (351) (75) (53) (76) (91)
Settlements, curtailments,
special termination benefits 49 - (5) - - -
Ending balance $6,553 $5,905 $2,445 $2,368 $1,304 $1,166
Reconciliation of plan assets at fair value
Beginning balance $6,954 $6,813 $2,011 $2,155 $ 601 $ 537
Actual return on plan assets (726) 384 (99) 5 (117) 4
Company contributions 104 90 53 60 135 139
Participant contributions - - 8 6 10 11
Foreign exchange rate changes - - 60 (157) - -
Benefit payments (279) (333) (73) (58) (75) (90)
Settlements, curtailments - - (5) - - -
Ending balance $6,053 $6,954 $1,955 $2,011 $ 554 $ 601
Funded status of plans
Plan assets at fair value
less benefit obligation $ (500) $1,049 $ (490) $ (357) $ (750) $ (565)
Unrecognized transition
(asset) obligation - - - 16 - -
Unrecognized prior service cost 117 129 32 25 (15) (26)
Unrecognized (gain) loss 643 (1,012) 459 311 406 160
Fourth quarter contribution 3 - - - 89 -
Net amount recognized $ 263 $ 166 $ 1 $ (5) $ (270) $ (431)
Amounts recognized in the
Consolidated Balance Sheet
consist of:
Prepaid assets $ 424 $ 319 $ 102 $ 80 - -
Accrued liabilities (196) (187) (277) (229) $ (270) $ (431)
Intangible assets 5 5 6 8 - -
Accumulated other comprehensive
income - pre-tax 30 29 170 136 - -
Net amount recognized $ 263 $ 166 $ 1 $ (5) $ (270) $ (431)
57
Benefit Plan Information Qualified and Non-qualified Postretirement
Pension Benefits Benefits
United States International
(Millions) 2001 2000 1999 2001 2000 1999 2001 2000 1999
Components of net periodic
benefit cost
Service cost $123 $125 $150 $ 91 $ 83 $ 88 $ 39 $ 39 $ 42
Interest cost 449 416 387 118 98 98 90 82 69
Expected return on assets (615) (565) (501) (142) (117) (108) (53) (47) (34)
Amortization of transition
(asset)obligation - - (37) 1 2 2 - - -
Amortization of prior service
cost or benefit 13 13 45 8 8 8 (11) (11) (11)
Recognized net actuarial
(gain) loss (9) (14) 14 11 7 2 10 3 -
Net periodic benefit cost $(39) $(25) $ 58 $ 87 $ 81 $ 90 $ 75 $ 66 $ 66
Curtailment, settlements and
special termination benefits 49 - - 1 - - 12 - -
Net periodic benefit cost
after curtailments
and settlements $ 10 $(25) $ 58 $ 88 $ 81 $ 90 $ 87 $ 66 $ 66
Weighted average assumptions
Discount rate 7.25% 7.50% 7.50% 5.23% 5.40% 5.67% 7.25% 7.50% 7.50%
Expected return on assets 9.00% 9.00% 9.00% 7.42% 7.14% 6.69% 9.50% 8.19% 8.19%
Compensation rate increase 4.60% 4.65% 4.65% 4.02% 4.28% 4.12% 4.60% 4.65% 4.65%
The company expects its health care cost trend rate for postretirement
benefits to slow from 8.5 percent in 2002 to 5.0 percent in 2006, after which
the rate is expected to stabilize. A one-percentage point change in the
assumed health care cost trend rates would have the effects shown in the
following table.
Health Care Cost One Percentage One Percentage
(Millions) Point Increase Point Decrease
Effect on current year's service
and interest cost $ 16 $(13)
Effect on benefit obligation 132 (113)
Leases
Rental expense under operating leases was $119 million in both 2001 and 2000,
and $113 million in 1999. The table below shows minimum payments under
operating leases with non-cancelable terms in excess of one year, as of
December 31, 2001.
After
(Millions) 2002 2003 2004 2005 2006 2006 Total
Minimum lease payments $79 $75 $40 $28 $20 $97 $339
58
Employee Savings and Stock Ownership Plans
The company sponsors employee savings plans under Section 401(k) of the
Internal Revenue Code. These plans are offered to substantially all regular
U.S. employees. Employee contributions of up to 6 percent of compensation are
matched at rates ranging from 25 to 50 percent, with additional company
contributions depending upon company performance. Only the company match is
invested in 3M stock, with employee funds invested in a number of investment
options. Vested employees may sell up to 50 percent of their 3M shares and
diversify into other investment options.
The company maintains an Employee Stock Ownership Plan (ESOP). This plan was
established in 1989 as a cost-effective way of funding the majority of the
company's contributions under 401(k) employee savings plans. Total ESOP
shares are considered to be shares outstanding for earnings per share
calculations.
Dividends on shares held by the ESOP are paid to the ESOP trust and, together
with company contributions, are used by the ESOP to repay principal and
interest on the outstanding notes. Over the life of the notes, shares are
released for allocation to participants based on the ratio of the current
year's debt service to the remaining debt service prior to the current
payment.
The ESOP has been the primary funding source for the company's employee
savings plans. Expenses related to the ESOP include total debt service on the
notes, less dividends. The company contributes treasury shares, accounted for
at fair value, to employee savings plans to cover obligations not funded by
the ESOP. These amounts are reported as an employee benefit expense. Unearned
compensation, shown as a reduction of stockholders' equity, is reduced
symmetrically as the ESOP makes principal payments on the debt.
Employee Savings and Stock Ownership Plans
(Millions) 2001 2000 1999
Dividends on shares held by the ESOP $ 31 $ 31 $ 31
Company contributions to the ESOP 17 15 7
Interest incurred on ESOP notes 18 19 21
Expenses related to ESOP debt service 14 12 14
Expenses related to treasury shares 3 35 50
ESOP Debt Shares 2001 2000 1999
Allocated 7,241,681 6,898,666 6,596,898
Committed to be released 49,135 194,187 280,615
Unreleased 5,549,275 6,116,961 6,709,549
Total ESOP debt shares 12,840,091 13,209,814 13,587,062
59
General Employees' Stock Purchase Plan
In May 1997, shareholders approved 15 million shares for issuance under the
company's General Employees' Stock Purchase Plan (GESPP). Substantially all
employees are eligible to participate in the plan. Participants are granted
options at 85 percent of market value at the date of grant. There are no
GESPP shares under option at the beginning or end of each year because options
are granted on the first business day and exercised on the last business day
of the same month.
General Employees' 2001 2000 1999
Stock Purchase Plan Exercise Exercise Exercise
Shares Price* Shares Price* Shares Price*
Options granted 998,276 $93.85 1,206,262 $77.40 1,210,189 $72.25
Options exercised (998,276) 93.85 (1,206,262) 77.40 (1,210,189) 72.25
Shares available for
grant - Dec. 31 9,565,450 10,563,726 11,769,988
*Weighted average
The weighted average fair value per option granted during 2001, 2000 and 1999
was $16.56, $13.65 and $12.75, respectively. The fair value of GESPP options
was based on the 15 percent purchase discount.
Management Stock Ownership Program
In May 1997, shareholders approved 35 million shares for issuance under the
Management Stock Ownership Program (MSOP). Management stock options are
granted at market value at the date of grant. These options generally are
exercisable one year after the date of grant and expire 10 years from the date
of grant. Thus, outstanding shares under option include grants from previous
plans. In May 2001, at the time of the last major grant, there were 11,784
participants in the plan.
Management Stock 2001 2000 1999
Ownership Program Exercise Exercise Exercise
Shares Price* Shares Price* Shares Price*
Under option-
Jan. 1 32,347,256 $79.34 30,702,415 $74.67 29,330,549 $67.72
Granted
Annual 6,541,299 117.25 6,040,196 88.33 5,194,766 95.00
Progressive
(Reload) 671,285 115.45 572,511 98.33 502,567 87.33
Exercised (4,826,135) 71.41 (4,684,779) 62.19 (4,201,886) 52.50
Canceled (183,517) 117.24 (283,087) 86.77 (123,581) 93.35
Dec. 31 34,550,188 $88.12 32,347,256 $79.34 30,702,415 $74.67
Options exercisable-
Dec. 31 27,536,534 $80.98 26,159,345 $77.02 25,213,683 $70.27
Shares available for grant -
Dec. 31 4,501,427 11,738,624 18,088,285
*Weighted average
60
Management Stock Ownership Program (continued)
MSOP Options Outstanding and Exercisable at December 31, 2001
Options Outstanding Options Exercisable
Range of Remaining
Exercise Contractual Exercise Exercise
Prices Shares Life (months)* Price* Shares Price*
$46.01-63.10 8,397,652 42 $55.97 8,397,652 $55.97
80.24-96.87 18,638,304 87 91.59 18,638,304 91.59
103.05-122.90 7,514,232 117 115.79 500,578 110.78
*Weighted average
For annual and progressive (reload) options the weighted average fair value at
date of grant was calculated utilizing the Black-Scholes option-pricing model
and the assumptions that follow.
Annual Progressive (Reload)
MSOP Assumptions 2001 2000 1999 2001 2000 1999
Exercise price $117.25 $88.33 $95.00 $115.45 $98.33 $87.33
Risk-free interest rate 4.8% 6.7% 5.4% 3.8% 6.3% 5.4%
Dividend growth rate 4.6% 4.3% 5.0% 4.6% 4.3% 5.0%
Volatility 24.1% 22.3% 22.3% 23.7% 25.4% 28.8%
Expected life (months) 67 68 66 28 28 26
Black-Scholes fair value $ 29.41 $22.45 $22.86 $ 17.62 $17.18 $16.00
The MSOP options, if exercised, would have had the following dilutive effect
on shares outstanding for the year ended 2001, 2000 and 1999, respectively:
5.6 million, 4.2 million and 4.5 million shares. Certain MSOP average options
outstanding during the years 2001, 2000 and 1999 (4.2, 11.5 and 8.7 million
shares, respectively) were not included in the computation of diluted earnings
per share because they would not have had a dilutive effect.
Stock-Based Compensation
Generally no compensation cost is recognized for either the General Employees'
Stock Purchase Plan (GESPP) or the Management Stock Ownership Program (MSOP).
Pro forma amounts based on the options' estimated fair value, net of tax, at
the grant dates for awards under the GESPP and MSOP are presented below.
Pro forma Net Income and Earnings Per Share
(Millions) 2001 2000 1999
Net income
As reported $1,430 $1,782 $1,763
Pro forma 1,278 1,668 1,652
Earnings per share - basic
As reported $ 3.63 $ 4.50 $ 4.39
Pro forma 3.24 4.22 4.11
Earnings per share - diluted
As reported $ 3.58 $ 4.45 $ 4.34
Pro forma 3.20 4.17 4.06
61
Legal Proceedings - Discussion of legal matters is incorporated by reference
from the subcaption "General" under Legal Proceedings, Part I, Item 3, of this
Annual Report on Form 10-K, and should be considered an integral part of the
Consolidated Financial Statements and Notes.
Quarterly Data (Unaudited)
(Millions, except per-share amounts)
First Second Third Fourth Year
Net sales
2001 $ 4,170 $ 4,079 $ 3,967 $ 3,863 $16,079
2000 4,075 4,243 4,270 4,136 16,724
Cost of sales*
2001 $ 2,196 $ 2,266 $ 2,156 $ 2,131 $ 8,749
2000 2,091 2,181 2,295 2,220 8,787
Income before cumulative effect of accounting change*
2001 $ 453 $ 202 $ 394 $ 381 $ 1,430
2000 487 470 499 401 1,857
Net income*
2001 $ 453 $ 202 $ 394 $ 381 $ 1,430
2000 487 470 499 326 1,782
Basic earnings per share - income before cumulative effect*
2001 $ 1.14 $ .51 $ 1.00 $ .97 $ 3.63
2000 1.22 1.19 1.26 1.02 4.69
Basic earnings per share - net income*
2001 $ 1.14 $ .51 $ 1.00 $ .97 $ 3.63
2000 1.22 1.19 1.26 .83 4.50
Diluted earnings per share - income before cumulative effect*
2001 $ 1.13 $ .50 $ .99 $ .96 $ 3.58
2000 1.21 1.18 1.25 1.00 4.64
Diluted earnings per share - net income*
2001 $ 1.13 $ .50 $ .99 $ .96 $ 3.58
2000 1.21 1.18 1.25 .82 4.45
Stock price comparisons (NYSE composite transactions)
2001 High $121.50 $127.00 $117.50 $121.90 $127.00
2001 Low 98.50 97.16 85.86 95.20 85.86
2000 High 103.81 98.31 97.44 122.94 122.94
2000 Low 78.19 80.44 80.50 83.94 78.19
62
Quarterly Data (continued)
(Unaudited)
*The impact of non-recurring items in 2001 and 2000 by quarter are as follows:
Non-recurring items
(Millions, except per-share amounts)
2001 First Second Third Fourth Year
Cost of sales $ 23 $141 $ 47 $ 61 $ 272
Selling, general and
administrative expenses -- 242 16 42 300
Research, development and
related expenses -- 14 6 -- 20
Other expense (income) -- -- -- (88) (88)
Operating income (loss) $ (23) $(397) $ (69) $ (15) $(504)
Net income (loss) $ (14) $(249) $ (43) $ (6) $(312)
Diluted earnings (loss)
per share $(.03) $(.62) $(.11) $(.02) $(.78)
Operating income (loss) detail:
Acquisition-related $ (23) $ -- $ -- $ -- $ (23)
Restructuring-related -- (397) (69) (103) (569)
Reversal of a 1999
litigation accrual -- -- -- 73 73
Net gain on sale of equity
securities, net of equity
securities write-down -- -- -- 15 15
Non-recurring items
(Millions, except per-share amounts)
2000 First Second Third Fourth Year
Cost of sales $ -- $ -- $118 $ 90 $ 208
Other expense (income) (50) -- (119) (16) (185)
Operating income (loss) $ 50 -- $ 1 $ (74) $ (23)
Cumulative effect of
accounting change (loss) $ -- $ -- $ -- $ (75) $ (75)
Net income (loss) $ 31 $ -- $ -- $(121) $ (90)
Diluted earnings (loss)
per share $.08 $ -- $ -- $(.30) $(.23)
Operating income (loss) detail:
Gain from termination of
distribution agreement $ 50 -- -- -- $ 50
Phase out of certain
products -- -- (106) (62) (168)
Gain on sale of equity
securities and other -- -- 107 (12) 95
63
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant. The information
relating to directors and nominees of 3M is set forth under the caption
"Proposal No. 1 - Election of Directors" in 3M's proxy statement for its 2002
annual meeting of stockholders ("3M Proxy Statement") and is incorporated by
reference herein. Information about executive officers is included in Item 1
of this Annual Report on Form 10-K.
Item 11. Executive Compensation. The information relating to executive
compensation is set forth under the captions "Summary Compensation Table,"
"Option Grants in Last Fiscal Year," "Option Exercises and Year-End Option
Values," "Long-Term Incentive Plan Awards," "Employment Contract, Termination
of Employment and Change-in-Control Arrangements," "Retirement Benefits," and
"Directors' Compensation" in 3M's Proxy Statement and such information is
incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management. The
information relating to security ownership of certain beneficial owners and
management is set forth under the caption "Beneficial Ownership Table" in 3M's
Proxy Statement and such information is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions. No matters require
disclosure here.
The registrant will file with the Commission a definitive proxy statement
pursuant to Regulation 14A by April 30, 2002.
64
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The consolidated financial statements filed as part of this report are
listed in the index to financial statements on page 31.
All financial statement schedules are omitted because of the absence of the
conditions under which they are required or because the required information
is included in the consolidated financial statements or the notes thereto.
(b) Reports on Form 8-K:
3M filed one Form 8-K on March 5, 2002, and one Form 8-K for the quarter ended
December 31, 2001.
The Form 8-K dated March 5, 2002, provided the opinion and consent of general
counsel in connection with the offering of $400 million in medium-term notes
due in the year 2005.
The Form 8-K dated November 19, 2001, provided the opinion and consent of
general counsel in connection with the offering of certain debt securities
due in the year 2041.
(c) Exhibits:
Incorporated by Reference:
Incorporated by Reference in the
Report From
(3.1) Certificate of incorporation, Form 8-K dated
as amended as of May 9, 2000. July 27, 2000.
(3.2) Bylaws, as amended as of November 11, 1996. Form 8-K dated
November 20, 1996.
65
(c) Exhibits (continued):
Incorporated by Reference:
Incorporated by Reference in the
Report From
(4) Instruments defining the rights of security
holders, including debentures:
(4.1) common stock. Registration No. 333-49830
on Form S-4/A filed on
January 11, 2001.
Registration No. 333-42660
on Form S-3/A filed on
August 18, 2000.
(4.2) debt securities. Form 8-K dated December 7,
2000 and Registration No.
333-48922 on Form S-3/A
filed on January 12, 2001.
(10) Material contracts, management
remuneration:
(10.1) management stock ownership program. Exhibit 4 of
Registration No. 333-30689
on Form S-8 filed on
July 2, 1997.
(10.2) profit sharing plan, performance Written description contained
unit plan and other compensation in issuer's proxy statement
arrangements. for the 2002 annual
shareholders' meeting.
(10.3) director stock ownership program. Exhibit 4 of Registration
Statement No. 333-44692
on Form S-8 filed on
August 29, 2000.
(10.4) deferred compensation obligations. Registration No. 333-73192
on Form S-8 filed on
November 13, 2001.
Reference (pages)
Form 10-K
Submitted herewith:
(10) Employment agreement dated January 23, 2002
between Registrant and Patrick D. Campbell 67-72
(12) Calculation of ratio of earnings
to fixed charges. 73
(21) Subsidiaries of the registrant. 74
(23) Consent of independent auditors. 75
(24) Power of attorney. 76
66
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
l934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MINNESOTA MINING AND MANUFACTURING COMPANY
By /s/ Patrick D. Campbell
Patrick D. Campbell, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
March 11, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 11, 2002.
Signature Title
W. James McNerney, Jr. Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer
and Director)
Linda G. Alvarado Director
Ronald O. Baukol Director
Edward A. Brennan Director
Edward M. Liddy Director
Aulana L. Peters Director
Ronald G. Nelson Vice President and Controller
Rozanne L. Ridgway Director
Kevin W. Sharer Director
Frank Shrontz Director
Louis W. Sullivan Director
Patrick D. Campbell, by signing his name hereto, does hereby sign this
document pursuant to powers of attorney duly executed by the other persons
named, filed with the Securities and Exchange Commission on behalf of such
other persons, all in the capacities and on the date stated, such persons
constituting a majority of the directors of the company.
By /s/ Patrick D. Campbell
Patrick D. Campbell, Attorney-in-Fact