Back to GetFilings.com
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, 2002
Commission file number 1-3285
3M 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 ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes X . No .
The aggregate market value of voting stock held by nonaffiliates of the
registrant, based on the closing price of $124.55 per share as reported on the
New York Stock Exchange-Composite Index was $48.6 billion on January 31, 2003
($48.0 billion at June 30, 2002, based on the closing price of $123.00).
Shares of common stock outstanding at January 31, 2003: 389,978,865.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the company's definitive proxy statement for its annual meeting
to be held on May 13, 2003, are incorporated by reference in this Form 10-K
in response to Part III, Items 10, 11, 12 and 13.
This document (excluding exhibits) contains 79 pages.
The table of contents is set forth on page 2.
The exhibit index begins on page 75.
2
3M COMPANY
ANNUAL REPORT ON FORM 10K
TABLE OF CONTENTS
PAGE
PART I
ITEM 1 -- Business --------------------------------------------- 3
ITEM 2 -- Properties ------------------------------------------- 8
ITEM 3 -- Legal Proceedings ------------------------------------ 9
ITEM 4 -- Submission of Matters to a Vote of Security Holders -- 14
PART II
ITEM 5 -- Market Price of Stock and Related Matters ------------ 15
ITEM 6 -- Selected Financial Data ------------------------------ 15
ITEM 7 -- Management's Discussion and Analysis ----------------- 16
ITEM 7A -- Quantitative and Qualitative Disclosures About
Market Risk ------------------------------------------ 37
ITEM 8 -- Financial Statements and Supplementary Data ---------- 38
Index to Financial Statements ------------------------ 38
ITEM 9 -- Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ------------------ 73
PART III
ITEM 10 -- Directors and Executive Officers of the Registrant --- 73
ITEM 11 -- Executive Compensation ------------------------------- 74
ITEM 12 -- Security Ownership of Certain Beneficial Owners
and Management --------------------------------------- 74
ITEM 13 -- Certain Relationships and Related Transactions ------- 74
ITEM 14 -- Controls and Procedures ------------------------------ 74
PART IV
ITEM 15 -- Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ------------------------------------------ 75
Index to Exhibits ------------------------------------ 75
3
3M COMPANY
FORM 10-K
For the Year Ended December 31, 2002
PART I
ITEM 1. BUSINESS.
3M Company, formerly known as Minnesota Mining and Manufacturing Company, was
incorporated in 1929 under the laws of the State of Delaware to continue
operations, begun in 1902. The Board of "Minnesota Mining and Manufacturing
Company" approved changing the company's name effective April 8, 2002, to "3M
Company." The MMM ticker symbol remained the same. As used herein, the term
"3M" or "company" includes 3M Company and its subsidiaries unless the context
otherwise indicates.
The company files annual reports, quarterly reports, proxy statements, and
other documents with the Securities and Exchange Commission (SEC) under the
Securities Exchange Act of 1934 (Exchange Act). The public may read and copy
any materials that the company files with the SEC at the SEC's Public Reference
Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers, including the company, that file electronically with the SEC. The
public can obtain any documents that the company files with the SEC at
http://www.sec.gov.
The corporation also makes available free of charge through its Internet
website (http://investor.3M.com) the company's Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if
applicable, amendments to those reports filed or furnished pursuant to the
Exchange Act as soon as reasonably practicable after the company electronically
files such material with, or furnishes it to, the SEC.
GENERAL
3M is a diversified global company with a market presence in health care,
safety, electronics, telecommunications, industrial, consumer and office, and
other markets. 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, 2002, the company employed 68,774 people.
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 214 sales offices worldwide, including 18 sales offices in the
United States and 196 sales offices internationally.
4
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
$1.070 billion, $1.084 billion and $1.101 billion in 2002, 2001 and 2000,
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 $738 million, $745 million and $727 million in
2002, 2001 and 2000, respectively. Related expenses primarily include technical
support provided by the laboratories for existing products.
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 2002. It is impossible to predict future shortages of raw
materials or the impact any such shortages would have.
ENVIRONMENTAL LAW COMPLIANCE
Most of 3M's manufacturing operations are affected by federal, state and local
environmental laws. 3M has made, and plans to continue making necessary
expenditures for compliance with applicable laws. 3M is also involved in
remediation actions relating to environmental matters from past operations at
certain sites (refer to Part I, Item 3, Legal Proceedings).
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. Environmental expenditures for capital projects that contribute to
current or future operations generally are capitalized and depreciated over
their estimated useful lives.
In 2002, 3M expended about $21 million for capital projects related to the
environment. The comparable amount in 2001 was about $7 million. These
amounts exclude expenditures for remediation actions relating to existing
matters caused by past operations. Capital expenditures for environmental
purposes have included pollution control devices--such as wastewater treatment
plants, groundwater monitoring devices, air strippers or separators, and
thermal oxidizers -- at new and existing facilities constructed or upgraded in
the normal course of business. Consistent with policies stressing
environmental responsibility, average annual capital expenditures (other than
for remediation projects) are presently expected to be about $70 million over
the next two years for new or expanded programs to build facilities or modify
manufacturing processes to minimize waste and reduce emissions.
While we cannot predict with certainty the future costs of such clean-up
activities, capital expenditures or operating costs for environmental
compliance, we do not believe they will have a material effect on our capital
expenditures, earnings or competitive position.
BUSINESS SEGMENTS
Financial information and other disclosures relating to 3M's business
segments and operations in certain geographic areas are provided
in the Notes to Consolidated Financial Statements. 3M's six
business segments bring together common or related 3M technologies,
enhancing the development of innovative products and services and
5
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 business segments.
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 insulation components for catalytic converters; 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 Insulation and Thinsulate brand Lite Loft brand
Insulation, 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 product line. In December 2002, 3M completed its acquisition of
Corning Precision Lens, Inc., a manufacturer of lens systems for projection
televisions. This acquisition also will be part of the Optical Systems product
line.
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 the medical and surgical area, 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 the 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, and in December 2002, 3M purchased the remaining 43 percent minority
interest of these operations.
Industrial Markets: Industrial products include a wide variety of coated and
nonwoven abrasives, adhesives, pressure-sensitive tape, and specialty products.
Major product lines include vinyl, polyester, foil and specialty industrial
tapes and adhesives; Scotch brand Masking Tape, Scotch brand Filament and
Packaging Tape; 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.
6
Consumer and Office Markets: Major consumer and office products include Scotch
brand tapes; Post-it brand Note products, such as Post-it brand flags, Post-it
brand memo pads, Post-it brand labels, and Post-it brand Pop-up notes and
dispensers; home care products, including Scotch-Brite brand Scour Pad,
Scotch-Brite brand Scrub Sponge, Scotch-Brite brand Microfiber Cloth products,
and 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.
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 electric
utilities, telecommunications and other industries. 3M Microinterconnect
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 products include many
innovative connecting, closure and splicing systems; maintenance products; and
test equipment. In 2000, 3M acquired 91 percent (subsequently increased to 99
percent) of Quante AG, a telecommunications supplier. 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 early 2003, 3M
acquired 100 percent of the common shares of Solvay Fluoropolymers, with
manufacturing facilities located in Decatur, Alabama.
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; as well as other products
including coatings used for oil and grease resistance on paper packaging;
fire-fighting foams; and specialty compounds used in the manufacture of other
products. The company has introduced alternatives for certain applications
and industry segments, including carpet protection.
NEW BUSINESS SEGMENTS REPORTING EFFECTIVE JANUARY 1, 2003
In September 2002, 3M announced it would strategically realign its organization
for faster growth and a closer focus on markets and customers. This
realignment resulted in seven new reportable business segments compared to the
current structure of six reportable business segments. These structural changes
were driven by 3M's strategic planning process and represent an important step
toward better access to its markets. Executive vice president appointments were
effective October 1, 2002, but a three-month transition period was provided to
realign the existing organization to the new structure. Internal management
reporting for the new reportable business segments commenced January 1, 2003.
7
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 1998-2003
- ---------------------- --- ----------------------- -------- --------------------------------------
W. James McNerney, Jr. 53 Chairman of the Board 2001 President and CEO, General Electric
and Chief Executive Officer Aircraft Engines, Cincinnati, Ohio,
1997-2000
Ronald R. Belschner 63 Vice President, 2000 Division Vice President, Industrial
Engineering, Manufacturing Tape and Specialties Division,
and Logistics 1995-2000
Robert J. Burgstahler 58 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 50 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
Joseph A. Giordano 54 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 56 Vice President, 1998 Staff Vice President, Human Resources
Human Resources Consulting and Resource Services,
1996-1998
Jay V. Ihlenfeld 51 Vice President, 2002 Executive Vice President, Sumitomo 3M
Research and Development Limited, 2001-2002
Division Vice President, Performance
Materials Division, 1999-2001
General Manager, Performance Materials
Division, 1999
Steven J. Landwehr 55 Executive Vice President, 2002 Division Vice President, Automotive
Transportation Business Aftermarket Division, 1999-2002
General Manager, Automotive Aftermarket
Division, 1997-1999
Moe S. Nozari 60 Executive Vice President, 2002 Executive Vice President, Consumer and
Consumer and Office Business Office Markets, 1999-2002
Group Vice President, Consumer and
Office Markets Group, 1996-1999
Frederick J. Palensky 53 Executive Vice President, 2002 Executive Vice President, Specialty
Safety, Security and Material Markets and Corporate
Protection Services Services, 2001-2002
Business Vice President and General Manager
3M ESPE, 2001
Division Vice President, Dental
Products Division, 1997-2001
David W. Powell 61 Vice President, Marketing 1999 Division Vice President, Stationery
and Office Supplies Division,
1996-1999
8
EXECUTIVE OFFICERS (continued)
Year Elected
to Present
Name Age Present Position Position Other Positions Held During 1998-2003
- ---------------------- --- ----------------------- -------- --------------------------------------
Charles Reich 60 Executive Vice President, 2002 Executive Vice President, Electro
Health Care Business and Communications Markets, 2001-2002
Executive Vice President, Specialty
Material Markets and Corporate Services,
1999-2001
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
Brad T. Sauer 43 Executive Vice President, 2002 Executive Director Six Sigma, 2001-2002
Electro and Communications Managing Director, 3M Korea Ltd.,
Business 1999-2001
New Business Development Director,
Commercial Graphics Division, 1999
General Manager, Medical Solutions
Business, Imation Corp., 1997-1999
James B. Stake 50 Executive Vice President, 2002 Division Vice President, Industrial Tape
Display and Graphics and Specialties Division; and Vice
Business President, Marketing, Industrial
Markets, 2002
Division Vice President, Industrial Tape
and Specialties Division, 2000-2002
Division Vice President, Packaging
Systems Division, 1999-2000
Managing Director, 3M Italy, 1998-1999
Managing Director, 3M Italy and Regional
Managing Director, Southern Europe
Region, 1996-1998
John J. Ursu 63 Senior Vice President 2003 Senior Vice President, Legal Affairs
and General Counsel, 1997-2002
Harold J. Wiens 56 Executive Vice President, 2002 Executive Vice President, Industrial
Industrial Business Markets, 1999-2002
Executive Vice President, Industrial
and Electro Markets, 1999
Executive Vice President, Industrial
and Consumer Markets, 1998-1999
Richard F. Ziegler 53 Senior Vice President, 2003 Partner, Cleary, Gottlieb, Steen
Legal Affairs and and Hamilton, 1983-2002
General Counsel
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 24
states. Internationally, 3M has 196 sales offices. The company operates 79
manufacturing and converting facilities in 29 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.
9
TTEM 3. LEGAL PROCEEDINGS.
GENERAL
- -------
The company and some of its subsidiaries are named defendants in a number of
claims, lawsuits, and governmental proceedings. These include products
liability claims and lawsuits involving products that the company now or
formerly manufactured and sold, and environmental proceedings. Some claimants
seek damages and other relief that, if granted, would require substantial
expenditures.
Some of these lawsuits and proceedings raise difficult and complex factual and
legal issues, and are subject to many uncertainties, such as the facts and
circumstances of the particular lawsuit, the jurisdiction and forum in which
the lawsuit is pending, and the applicable law. The company records
liabilities in those instances where it can reasonably estimate the amount of
the loss and where liability probably will arise. The company also records
receivables for the probable amount of insurance that it expects to recover
under the company's insurance program in those instances.
The company cannot always definitively determine possible liabilities that
exceed recorded amounts related to the legal proceedings to which it is a
party. There can be no certainty that the company may not ultimately incur
charges, whether related to products liability, antitrust, or other
litigation, environmental matters, or other actions, in excess of presently
recorded liabilities. However, the company believes it unlikely, based upon
the nature of the legal proceedings and its current knowledge of relevant
facts and circumstances, that the possible liabilities exceeding recorded
amounts would be material individually or in the aggregate 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. Given the uncertainty of litigation and in making future
projections, the company has and will continue to periodically reexamine its
estimates of probable liabilities and any associated expenses and receivables
and make appropriate adjustments to such estimates based on experience and
developments in the litigation. As a result, the current estimates of the
potential impact on the company's consolidated financial position, results of
operations and cash flows for the proceedings and claims described in "Legal
Proceedings" could change in the future.
ANTITRUST LITIGATION
- ---------------------
As previously reported, LePage's Inc. filed a lawsuit against the company in
June 1997 in the United States District Court for the Eastern District of
Pennsylvania alleging that certain marketing practices of the company violated
the antitrust laws. On October 8, 1999, the jury awarded LePage's damages of
$22.8 million. The company recorded a pre-tax charge of $73 million in the
third quarter of 1999 related to the adverse jury verdict (the $22.8 million
verdict is automatically tripled under the law) and attorneys' fees and costs.
In January 2002, the Third Circuit Court of Appeals reversed the trial court's
decision and, as a result, the company reversed the $73 million pre-tax
charge. On February 25, 2002, the Third Circuit Court of Appeals vacated its
prior ruling and ordered a re-hearing by the full court. Oral argument on the
appeal was heard on October 30, 2002. The company expects the decision of the
Third Circuit Court of Appeals during the first or second quarter of 2003.
Because the company believes that the trial court judgment will
again be overturned, no liability has been recorded related to this
matter as of December 31, 2002. If the Third Circuit Court of Appeals
affirms the trial court judgment, and the United States Supreme Court
declines to review the case, the company would incur a pre-tax
10
charge of approximately $85 million related to the adverse jury verdict plus
interest. 3M would also be liable for LePage's attorneys' fees and costs, an
amount that has not yet been determined by the court. After the verdict in
the LePage's action, purchasers of transparent tape filed three class action
lawsuits against the company in California and Pennsylvania alleging that
certain marketing practices of the company violated the state or federal
antitrust laws. Those actions are pending.
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 vast majority of claims against the company
have been resolved. Claims against the company registered in the revised
class action settlement program approved by the United States District Court
for the Northern District of Alabama (the "Revised Settlement Program") have
been or will be resolved through the Revised Settlement Program. The company
has confirmed that approximately 7 remaining claimants who have opted out of
the Revised Settlement Program have 3M implants. The company does not consider
its remaining probable liability for these confirmed cases to be material.
The company's insurers providing occurrence-based coverage initiated a
declaratory judgment action in Ramsey County Minnesota against the company
seeking adjudication of certain coverage and allocation issues. 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 trial court's rulings in post verdict motions were generally favorable to
the company. The court awarded the company prejudgment interest on amounts
owing by insurers, including a portion of the company's reasonable attorneys
fees in connection with the insurance coverage litigation. 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. On September 24, 2002, the Minnesota Court of
Appeals affirmed in part and reversed in part the trial court's judgment. The
Court of Appeals confirmed coverage but allocated the coverage so as to reduce
a substantial portion of the amounts owing by insurers for losses and defense
costs as reflected in the trial court judgment. The Court of Appeals also
reversed the company's award of attorneys' fees referenced above. On December
17, 2002, the Minnesota Supreme Court granted the company's Petition for
Review permitting the company to appeal the Court of Appeal's decision. The
company believes that it is likely to obtain relief in the Minnesota Supreme
Court. If the Minnesota Supreme Court does not grant relief as anticipated,
the company could be effectively deprived of significant and potentially
material insurance coverage for breast implant claims.
The company also initiated an arbitration proceeding in London, England, to
recover insurance coverage for some of its breast implant liability and costs
from certain claims-made insurance carriers. A hearing was conducted in
January 2003 and the arbitration is expected to be completed in the second
half of 2003. If the panel decides the coverage question in the company's
favor, it will then determine the amount of coverage in a subsequent
proceeding.
As of December 31, 2002, the company had receivables for insurance recoveries
related to the breast implant matter of $339 million, representing settled but
yet to be received amounts ($16 million), as well as amounts contested by the
insurance carriers in the Minnesota litigation and the London arbitration
($323 million). Various factors could affect the timing and amount of
insurance proceeds to be received under the company's various insurance
policies, including (i) the outcome of occurrence insurance litigation in the
courts of Minnesota (as discussed above); (ii) the outcome of the arbitration
with claims-made insurers in London; and (iii) 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.
11
RESPIRATOR/MASK/ASBESTOS LITIGATION
- -----------------------------------
For more than 20 years, the company has successfully defended and resolved the
claims of over 200,000 individual claimants alleging injuries from
occupational dust exposures. The vast majority of the lawsuits and claims
resolved by the company alleged use of some of the company's mask and
respirator products and sought damages from the company and other defendants
for alleged personal injury from work place exposures to asbestos or, less
frequently, silica and other occupational dust, found in products manufactured
by other defendants. The remaining claimants generally alleged 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 manufactured by the company and/or
other defendants.
The company's vigorous defense of this litigation has resulted in: (i) jury
verdicts for the company in two of three cases tried to verdict; (ii)
dismissals of lawsuits without any payment by the company; and (iii) an
average settlement value of less than $1,000 per claimant for all of 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 identified by the
plaintiffs.
As previously reported, in October 2001, the company defended at trial, in the
Circuit Court of Holmes County, Mississippi, plaintiffs' claims that a 3M
respirator and mask did not protect them against contracting certain asbestos-
related diseases allegedly caused by exposure to asbestos-containing products
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, 2001
the jury returned verdicts 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 of the four
verdicts against it is $22.5 million. The company can provide no assurance at
this time about the ability of the other two co-defendants to pay their
respective shares of any ultimate judgment or whether a co-defendant's
inability to pay will cause a reallocation of the liability for damages among
the remaining solvent defendants under state law. One of the co-defendants,
ACandS, has filed for Chapter 11 bankruptcy protection. Another co-defendant,
Dresser Industries, is a subsidiary of Halliburton Company, which announced on
December 18, 2002 a global settlement agreement of all personal injury
asbestos claims against Halliburton Company and its subsidiaries. The company
does not know at this time the impact of the settlement agreement on the
judgment in the Mississippi case against Dresser Industries. Judgment was
entered on January 30, 2002. The trial court denied the company's post-trial
motions in a decision on August 21, 2002, and the company filed a notice of
appeal with the Mississippi Supreme Court. Because the company believes that
the judgment ultimately will be overturned, no liability has been recorded
related to this matter as of December 31, 2002. If any damages are ultimately
assessed against the company, the company expects a substantial portion of
such damages to be covered by the company's product liability insurance.
As of December 31, 2002, the company is a named defendant, with multiple
co-defendants, in numerous lawsuits in various courts that purport to
represent approximately 45,000 individual claimants. The vast majority
of these current claimants allege use of some of the company's mask and
respirator products and seek damages from the company and other defendants
for alleged personal injury from work place exposures to asbestos or,
less frequently, silica and other occupational dust, found in products
manufactured by other defendants. The remaining claimants 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 manufactured by the company
and/or other defendants. The company settled an unusually large number of
pending claims during 2002 and thus had a substantial reduction in the number of
12
open claims - from approximately 80,000 claimants at the end of 2001 to
approximately 45,000 at the end of 2002.
In the fourth quarter of 2002, the company was served with complaints
identifying approximately 6,000 claimants in Mississippi. We believe that this
activity is related to tort reform legislation adopted in Mississippi in
November 2002 that went into effect on January 1, 2003, and that the new cases
were filed in anticipation of the new law. We expect to see an additional
increase in Mississippi claims in the first quarter as there is often a delay
between the filing of complaints and service of the complaints on the company.
Plaintiffs have asserted specific dollar claims for damages in only about one-
sixth of the 7,404 lawsuits that were pending against the company at the end
of 2002 in all jurisdictions. A majority of states restrict or prohibit
specifying damages in tort cases such as these, and most of the remaining
jurisdictions do not require such specification. In those cases in which
plaintiffs choose to assert specific dollar amounts in their complaints,
brought in states that permit such pleading, the amounts claimed are typically
not meaningful as an indicator of the company's potential liability. This is
because (a) the amounts claimed typically bear no relation to the level of
plaintiff's injury, if any; (b) the complaints nearly always assert claims
against multiple defendants with the typical complaint asserting claims
against an average of 88 different defendants, the damages alleged are not
attributed to individual defendants, and a defendant's share of liability may
turn on the law of joint and several liability, which can vary by state, and
by the amount of fault a jury allocates to each defendant if a case is
ultimately tried before a jury; (c) many cases are filed against the company
even though the plaintiffs did not use any of the company's products and,
ultimately, are withdrawn or dismissed without any payment; and (d) many cases
are brought on behalf of plaintiffs who have not suffered any medical injury,
and, ultimately, are resolved without any payment or a payment that is a small
fraction of the damages initially claimed. Of the 1,274 pending cases in which
purported damage amounts are specified in the complaints, 579 cases involve
claims of $100,000 or less, 177 cases involve claims between $100,000 and $3
million (37 of these cases also allege punitive damages of $250,000 and 42 of
these cases also allege punitive damages of $2.5 million), 117 cases involve
claims of $7.5 million (with an equal amount of punitive damages), 365 cases
involve claims of $10 million (316 of which also allege an equal amount in
punitive damages), 3 cases involve claims of $15 million, 2 cases involve
claims of $20 million, and 31 cases involve claims of $50 million (5 of which
also allege punitive damages of $5 million). Some complaints allege that the
compensatory and punitive damages are at least the amounts specified. As noted
above, the company has more than 20 years of experience in defending
litigations of this type, and has to date resolved the claims of over 200,000
plaintiffs. The cumulative average settlement amount is less than $1,000 per
claimant. Based on this experience and for the other reasons noted above the
company believes that the damage amounts specified in complaints are not a
meaningful factor in any assessment of the company's potential liability.
As of December 31, 2002, the company had estimated accrued liabilities of
approximately $161 million for respirator/mask asbestos related claims, a
substantial portion of which the company expects to be covered by its product
liability insurance. This amount represents the company's best estimate of
the amount to cover the cost and expense of resolving recently settled,
current and probable future respirator/mask asbestos related claims. The
company also had receivables for expected insurance recoveries of
approximately $264 million. 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) delays
in or avoidance of payment by insurers; and (iii) the extent to which insurers
may become insolvent in the future. There can be no absolute assurance that
the company will collect all amounts recorded as being probable of recovery
from its insurers.
The difference between the accrued liability and insurance
receivable represents the time delay between payment of claims and
receipt of insurance reimbursements. Because of the lag time between
settlement and payment of a claim, no meaningful conclusions may be
drawn from quarterly changes in the amount of receivables for
13
expected insurance recoveries and the quarterly changes in the number of
claimants at the end of each quarter.
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. Recent developments in the mix of newly
filed respirator/mask lawsuits (some increase in the proportion of silica-
related claims) and the defense costs associated with the company's continued
aggressive defense strategy will be closely monitored by the company in the
near term. Additional 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) significant changes in the number of
future claims, (ii) significant changes in the average cost of resolving
claims, (iii) significant changes in the legal costs of defending these
claims and in maintaining trial readiness, (iv) changes in the nature of
claims received, (v) changes in the law and procedure applicable to these
claims, (vi) financial viability of other co-defendants and insurers, and
(vii) 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
locations. The company has identified numerous locations, most of which are in
the United States, at which it may have some liability. 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, 2002,
the company had recorded liabilities of $37 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 such
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)
14
changes in the information available regarding the environmental impact
of the company's operations and products; (ii) changes in environmental
regulations or enforcement policies, including efforts to recover
natural resource damages; (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.
The company has been voluntarily cooperating with ongoing reviews by the
Environmental Protection Agency (EPA) and international agencies of the
possible environmental and health effects of perfluorooctanyl chemistry. As
previously announced, the company has been phasing out its production of such
compounds. With respect to one such compound the EPA is currently considering
possible regulatory action under its statutory authority relating to compounds
that may pose possible human health effects. The company recently confirmed
to the EPA its intent to continue its ongoing health and environmental
investigation and assessment of this compound. As a result of its phase-out
decision, the company no longer manufactures that compound except that a
subsidiary produces limited quantities for its own industrial use. The
company cannot predict what regulatory action, if any, may be taken regarding
some or all of such compounds or the consequences of any such action.
On September 30, 2002, a former employee filed an amended complaint against
the company in the Circuit Court of Morgan County, Alabama seeking unstated
compensatory and punitive damages and alleging that the plaintiffs suffered
fear, increased risk and sub clinical injuries from exposure to
perfluorooctanyl chemistry at or near the company's Decatur, Alabama
manufacturing facility. The complaint also alleges that the company acted
improperly with respect to disclosures to workers concerning such chemistry.
Recently, the plaintiffs sought to add as plaintiffs another former employee,
a current employee and their minor children. The company believes that these
allegations have no merit and is vigorously defending these claims.
The company has agreed to enter into a consent agreement with the State of New
York Department of Environmental Conservation for alleged violations of the
New York air emissions regulations. The proposed agreement calls for a penalty
of $212,000, a portion of which will be used to improve processes at the
company's Tonawanda, New York manufacturing facility.
As previously reported, the company entered into a voluntary agreement with
the EPA under both an "Agreement for TSCA Compliance" and the EPA's Incentives
for Self Policing Policy. The company voluntarily conducted an audit under
the Toxic Substances Control Act (TSCA) of its facilities and business units
and to identify studies that under current EPA guidelines could be potentially
subject to notification under TSCA section 8(e). The company has reached an
agreement in principle with the EPA under which it would pay $222,000 in
penalties in connection with the first two phases of this audit relating to
perfluorooctanyl chemistry studies. The third phase, relating to this and
other chemistries, is expected to be completed in early 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None in the quarter ended December 31, 2002.
15
PART II
ITEM 5. MARKET PRICE OF 3M'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
At January 31, 2003, there were approximately 125,216 shareholders of record.
3M's stock is listed on the New York, Pacific, Chicago and Swiss stock
exchanges. Cash dividends declared and paid totaled $.62 per share for each
quarter of 2002, and $.60 per share for each quarter of 2001. Stock price
comparisons follow.
- -----------------------------------------------------------------------------
Stock price comparisons (NYSE composite transactions)
First Second Third Fourth
(Per share amounts) Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------
2002 High $123.70 $130.60 $130.09 $131.55 $131.55
2002 Low 100.00 112.30 108.20 110.75 100.00
2001 High $121.50 $127.00 $117.50 $121.90 $127.00
2001 Low 98.50 97.16 85.86 95.20 85.86
- -----------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA.
- ------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts)
Years ended December 31: 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net sales........................... $16,332 $16,054 $16,699 $15,723 $15,094
Income from continuing operations... 1,974* 1,430* 1,857* 1,763** 1,213**
Per share of common stock:
Continuing operations - basic..... 5.06* 3.63* 4.69* 4.39** 3.01**
Continuing operations - diluted... 4.99* 3.58* 4.64* 4.34** 2.97**
Cash dividends declared and paid.. $ 2.48 $ 2.40 $ 2.32 $ 2.24 $ 2.20
At December 31:
Total assets ....................... $15,329 $14,606 $14,522 $13,896 $14,153
Long-term debt (excluding portion due
within one year).................. 2,140 1,520 971 1,480 1,614
- -------------------------------------------------------------------------------------
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, 2002 includes
non-recurring net losses of $202 million ($108 million after tax and minority
interest), or 27 cents per diluted share, related to charges in connection with
3M's restructuring plan. 2001 includes non-recurring net losses 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 non-recurring net losses of $23 million ($15 million after tax),
or 4 cents per diluted share, related to charges recorded for the company's
phase-out of its 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.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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; obtain
adequate intellectual property protection; gain market acceptance of new
products, or successfully complete clinical trials and obtain regulatory
approvals. As with any pharmaceutical under development, there are substantial
risks and uncertainties in the process of development and regulatory review.
There are no guarantees that products will receive regulatory approvals or
prove to be commercially successful.
* 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,
divestitures and strategic alliances. However, there can be no absolute
assurance that these will be completed or beneficial to the company.
17
* 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.
CRITICAL ACCOUNTING ESTIMATES
As stated in our significant accounting policies in Note 1 to the Consolidated
Financial Statements, the preparation of financial statements requires
management to make estimates and assumptions. The company believes its most
critical accounting estimates relate to legal proceedings, potential asset
impairment issues, and the company's pension and postretirement obligations.
Legal Proceedings:
The company's core activities relate to the development, manufacture and sale
of thousands of products to numerous markets. While this risk dispersion
provides a measure of overall stability, it also results in legal risks in
some areas. The company records liabilities in those instances where it can
reasonably estimate the amount of the loss and where liability probably will
arise. The company also records receivables for the probable amount of
insurance that it expects to recover under the company's insurance program in
those instances. The company cannot always definitively determine possible
liabilities that exceed recorded amounts related to the legal proceedings to
which it is a party. There can be no certainty that the company may not
ultimately incur charges, whether related to products liability, antitrust, or
other litigation, environmental matters, or other actions, in excess of
presently recorded liabilities. However, the company believes it unlikely,
based upon the nature of the legal proceedings and its current knowledge of
relevant facts and circumstances, that the possible liabilities exceeding
recorded amounts would be material individually or in the aggregate to its
consolidated financial position, results of operations or cash flows.
Known legal risks include the ultimate collection of breast implant insurance
receivables (a matter currently in dispute with the company's insurance
carriers), respirator/mask/asbestos insurance receivables collection and
probable liabilities, and an outstanding lawsuit filed by LePage's
Incorporated that extends back to 1997.
Summary amounts concerning the breast implant and respirator/mask/asbestos
litigation follow.
- ----------------------------------------------------------------------
At December 31 2002 2001 2000
(Millions)
- ----------------------------------------------------------------------
Breast implant receivables $339 $406 $519
Breast implant liabilities $ 5 $ 20 $ 32
Respirator/Mask/Asbestos receivables $264 $223 $155
Respirator/Mask/Asbestos liabilities $161 $156 $108
- ----------------------------------------------------------------------
At December 31, 2002, the company has accrued receivables of $339 million
relating to breast implants. Of this $339 million, $16 million represents
settled but yet to be received amounts, while $323 million has been contested
by insurance carriers. The company believes that it is likely to obtain
relief in the Minnesota Supreme Court. If the Minnesota Supreme Court does
not grant relief as anticipated, the company could be effectively deprived of
significant and potentially material insurance coverage for breast implant
claims. As part of the company's efforts to recover the amounts contested by
the insurance carriers, the company 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 will first consider whether the policy provides insurance coverage
for the company's breast implant liability and costs. If the panel favorably
decides the coverage question for the company, it will then determine the
amount of coverage in a subsequent hearing later in 2003.
18
The company's remaining respirator/mask/asbestos liability is $161 million at
December 31, 2002. This estimate represents the company's best estimate of
its liability. If amounts are paid in settlement of claims or if any damages
are ultimately assessed against the company in current or future litigation, a
substantial portion of such amounts is expected to be covered by the company's
product liability insurance. 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) delays in or avoidance of payment by insurers; and (iii) the extent to
which insurers may become insolvent in the future. There can be no certainty
that the company will collect all amounts recorded as being probable of
recovery from its insurers.
3M has not recorded any liability for the LePage's Incorporated litigation as
of December 31, 2002. 3M expects to prevail in this litigation, but if 3M
does not prevail, 3M would incur a pre-tax charge of approximately $85
million. 3M would also be potentially liable for LePage's attorneys' fees and
costs.
Potential Asset Impairment Issues:
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. This includes 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, 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. 3M has
approximately $1.9 billion of goodwill that, based on impairment testing, is
not impaired. A portion of this goodwill (approximately $220 million) is in
3M's telecommunications business, which the company believes will maintain its
value. However, if unanticipated events impact this sector for an extended
period of time, it could create future impairment losses.
Pension and Postretirement Obligations:
Pension expense impacted 2002 earnings by 16 cents per diluted share compared
with pension expense of 8 cents per diluted share in 2001. The company expects
pension expense to increase approximately another 10 cents per diluted share
in 2003, largely attributed to unrecognized losses on pension assets related
to equity market weakness the last few years. In accounting for pension and
postretirement benefits, costs and related liabilities are developed using
actuarial valuations. These valuations include key assumptions determined by
management, including the discount rate and expected long-term rate of return
on plan assets. For the United States pension plan expense calculation for
2003, the company's long-term rate of return on asset assumption remains at 9
percent and its year-end 2002 discount rate assumption is 6.75 percent (which
is used for 2003 expense calculations), which represents a half percentage
point reduction from the year-end 2001 discount rate. The discount rate
decrease is consistent with changes in high-quality long-term corporate bond
indices. The expected long-term rate of return assumption considers the asset
mix of the plans (approximately 70 percent equity securities and 30 percent
fixed income), past performance, and other factors. Estimates and assumptions
concerning the company's pension and postretirement obligations and related
periodic cost can be found in Note 14 to the Consolidated Financial
Statements. Material changes in pension and postretirement benefit costs may
occur in the future due to changes in these assumptions. Future annual
amounts could be impacted by changes in the number of plan participants,
changes in the level of benefits provided, changes in the discount rates,
changes in the expected long-term rate of return, changes in the level of
contributions to these plans and other factors. A quarter percentage point
change in the discount rate would impact 3M's pension expense by approximately
$32 million on a pre-tax basis. A quarter percentage point change in the
expected long-term rate of return would impact 3M's pension expense by
approximately $23 million on a pre-tax basis.
19
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.
OPERATING RESULTS
Overview:
Net income totaled $1.974 billion, or $4.99 per diluted share, compared with
$1.430 billion, or $3.58 per diluted share, in 2001, and $1.782 billion, or
$4.45 per diluted share, in 2000. In the first half of 2002, net income was
impacted by non-recurring charges of $108 million, or 27 cents per diluted
share, related to the company's restructuring program that was approved in June
2001. In 2002, currency effects reduced earnings by 8 cents per diluted share,
while the adoption of a new accounting standard resulting in the cessation of
goodwill amortization and other indefinite-lived intangible asset amortization
increased earnings by 12 cents per diluted share. In 2001, net income was
impacted by non-recurring charges of $312 million, or 78 cents per diluted
share, primarily related to the restructuring program approved in June 2001.
In 2000, net income was impacted by non-recurring charges of $90 million, or 23
cents per diluted share. Additional details concerning non-recurring items
follow.
Non-recurring items:
In January 2003, the Securities and Exchange Commission issued Regulation G,
"Conditions for Use of Non-GAAP Financial Measures" a rule directed by the
Sarbanes-Oxley Act of 2002. This rule requires public companies that disclose
or release non-GAAP financial measures to include the most directly comparable
GAAP financial measure, to provide a reconciliation of the disclosed non-GAAP
measure to the most comparable GAAP measure, and requires companies to furnish
earnings releases or similar announcements to the Commission on Form 8-K.
This rule will apply to all subject disclosures as of March 28, 2003. The
rule also provides guidance on what constitutes "non-recurring, infrequent, or
unusual" as applied to specific financial transactions or events. The company
currently provides reconciliations of its disclosed non-GAAP financial
reporting to the most comparable GAAP financial reporting.
In addition to Regulation G, the SEC amended Item 10 of Regulation S-K to
provide additional guidance to registrants that include non-GAAP financial
measures in SEC filings. This guidance would prohibit the presentation of
certain non-GAAP financial measures that exclude from reported results non-
recurring, infrequent or unusual items when the nature of the charge or gain
is such that is it reasonably likely to recur within two years or there was a
similar charge or gain within the prior two years. This guidance could result
in changes in the company's future presentation of non-GAAP financial
measures.
In 2002, non-recurring charges reduced operating income by $202 million and net
income by $108 million. These charges principally related to employee
severance and benefit costs, accelerated depreciation charges, and other
associated exit costs under the company's restructuring plan announced in June
2001. These charges are included in cost of sales ($121 million); selling,
general and administrative expenses ($77 million); and research, development
and related expenses ($4 million). Of the total 2002 charges, $111 million
related to employee severance and benefit costs, $47 million related to
accelerated depreciation of property, plant and equipment (incremental charges
resulting from shortened depreciable lives of affected assets, primarily
related to downsizing or consolidating manufacturing operations), and $44
million related to other exit activities. Other exit activities included
incremental costs and contractual obligations for items such as lease
termination payments and other facility exit costs (such as demolition of
buildings, inventory disposals, other) incurred as a direct result of the plan.
Additional information concerning non-recurring items is provided in the
Notes to Consolidated Financial Statements and elsewhere herein.
20
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 approved
in June 2001, were included in 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 $73 million of
income due to the 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. Oral arguments
on the appeal were heard on October 30, 2002, and the company expects a
decision in 2003. 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 permanently impaired 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, and
reported 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 mentioned items were $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 net income by $75 million.
Pro forma amounts (excluding non-recurring items):
The company believes that discussion of results excluding significant non-
recurring items provides a useful analysis of ongoing operating trends. The
pro forma amounts (which exclude non-recurring items) that follow are not in
accordance with, or preferable to, amounts determined in conformity with U.S.
generally accepted accounting principles. Reference should be made to the
Consolidated Financial Statements and accompanying Notes for additional
information concerning non-recurring items, and for additional information on
amounts determined in accordance with U.S. generally accepted accounting
principles. There is discussion of operating measures that exclude non-
recurring items within this "Operating Results" section. The determination of
non-recurring items may not be comparable to similarly titled measures used by
other companies. An (#) is used to cross-reference such subsequent discussion
to this paragraph.
21
The tables that follow show amounts excluding non-recurring items, non-
recurring items, and the reported amounts for years 2002, 2001 and 2000.
- -------------------------------------------------------------------------------
Supplemental Unaudited Consolidated Statement of Income Information
Years ended December 31
(Amounts in millions, except per share amounts)
2002 2001
- -----------------------------------------------------------------------------------
Excluding Excluding
non- Non- non- Non-
recurring recurring REPORTED recurring recurring REPORTED
items(#) items TOTAL items(#) items TOTAL
- -----------------------------------------------------------------------------------
Net sales $16,332 $ -- $16,332 $16,054 $ -- $16,054
- -----------------------------------------------------------------------------------
Operating expenses
Cost of sales 8,375 121 8,496 8,477 272 8,749
Selling, general and
administrative
expenses 3,643 77 3,720 3,736 300 4,036
Research, develop-
ment and related
expenses 1,066 4 1,070 1,064 20 1,084
Other expense
(income) -- -- -- -- (88) (88)
- -----------------------------------------------------------------------------------
Total 13,084 202 13,286 13,277 504 13,781
- -----------------------------------------------------------------------------------
Operating
income (loss) 3,248 (202) 3,046 2,777 (504) 2,273
Interest expense
and (income), net 41 -- 41 87 -- 87
- -----------------------------------------------------------------------------------
Income (loss) before
income taxes and
minority interest 3,207 (202) 3,005 2,690 (504) 2,186
Provision (benefit)
for income taxes 1,042 (76) 966 886 (184) 702
Effective tax rate 32.5% 32.1% 32.9% 32.1%
Minority interest 83 (18) 65 62 (8) 54
- -----------------------------------------------------------------------------------
Net income (loss) $ 2,082 $(108) $ 1,974 $ 1,742 $(312) $ 1,430
- -----------------------------------------------------------------------------------
Weighted average
diluted shares 395.5 399.9
Net income per
diluted share $ 4.99 $ 3.58
- -----------------------------------------------------------------------------------
(#) Refer to discussion in pro forma amounts paragraph of this section
22
- --------------------------------------------------------------------
Supplemental Unaudited Consolidated Statement of Income Information
Year ended December 31
(Amounts in millions, except per share amounts)
2000
- --------------------------------------------------------------------
Excluding
non- Non-
recurring recurring REPORTED
items(#) items TOTAL
- --------------------------------------------------------------------
Net sales $16,699 $ -- $16,699
- --------------------------------------------------------------------
Operating expenses
Cost of sales 8,579 208 8,787
Selling, general and
administrative
expenses 3,938 -- 3,938
Research, develop-
ment and related
expenses 1,101 -- 1,101
Other expense
(income) -- (185) (185)
- --------------------------------------------------------------------
Total 13,618 23 13,641
- --------------------------------------------------------------------
Operating
income (loss) 3,081 (23) 3,058
Interest expense
and (income), net 84 -- 84
- --------------------------------------------------------------------
Income (loss) before
income taxes and
minority interest
and cumulative
effect of account-
ing change 2,997 (23) 2,974
Provision (benefit)
for income taxes 1,033 (8) 1,025
Effective tax rate 34.5% 34.5%
Minority interest 92 -- 92
- --------------------------------------------------------------------
Income (loss)
before cumulative
effect of account-
ing change $ 1,872 $ (15) $ 1,857
Cumulative effect
of accounting
change -- (75) (75)
- --------------------------------------------------------------------
Net income (loss) $ 1,872 $ (90) $ 1,782
- --------------------------------------------------------------------
Weighted average
diluted shares 399.9
Net income per
diluted share $ 4.45
- --------------------------------------------------------------------
(#) Refer to discussion in pro forma amounts paragraph of this
section
23
Net Sales:
- ------------------------------------------------------------------------------
Components of Net Sales Change
2002 2001
W.W. U.S. Intl. W.W. U.S. Intl.
- ------------------------------------------------------------------------------
Volume - core 1.0% (1.6)% 3.2% (3.5)% (6.8)% (0.7)%
Volume - acquisitions
and divestitures 0.4 0.4 0.4 2.6 2.1 3.0
Price 0.2 (0.1) 0.5 0.3 0.7 0.1
Translation 0.1 -- 0.3 (3.3) -- (6.2)
- ------------------------------------------------------------------------------
Total 1.7% (1.3)% 4.4% (3.9) (4.0) (3.8)%
- ------------------------------------------------------------------------------
Worldwide net sales in 2002 totaled $16.332 billion, compared with $16.054
billion in 2001 and $16.699 billion in 2000. In 2002, core volume (which
excludes acquisition and divestiture impacts) increased 1.0 percent.
Acquisitions increased net sales by four-tenths of one percent. Selling prices
were up two-tenths of one percent. Changes in the value of the U.S. dollar
increased worldwide net sales by one-tenth of one percent. In the United
States, net sales for 2002 totaled $7.426 billion, with core volume down 1.6
percent. International net sales for 2002 totaled $8.906 billion (up 4.4
percent in U.S. dollars), with core volume up 3.2 percent.
In 2001, core volume declined by 3.5 percent. Acquisitions increased net sales
by 2.6 percent. The stronger U.S. dollar reduced sales by 3.3 percent. In the
United States, sales totaled $7.523 billion, down 4 percent from 2000. U.S.
core volume declined 6.8 percent. Internationally, sales totaled $8.531
billion, down 3.8 percent from 2000. International core volume declined seven-
tenths of one percent. The stronger U.S. dollar reduced international sales by
6.2 percent.
Costs:
- -----------------------------------------------------------------------------
Reported (Percent of sales) 2002 2001 2000
- -----------------------------------------------------------------------------
Cost of sales 52.0 54.5 52.6
Selling, general and administrative expenses 22.8 25.1 23.6
Research, development and related expenses 6.5 6.8 6.6
Operating income 18.7 14.2 18.3
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Excluding non-recurring items (#)
(Percent of Sales) 2002 2001 2000
- -----------------------------------------------------------------------------
Cost of sales 51.3 52.8 51.4
Selling, general and administrative expenses 22.3 23.3 23.6
Research, development and related expenses 6.5 6.6 6.6
Operating income 19.9 17.3 18.4
- -----------------------------------------------------------------------------
Cost of sales for 2002 was 52.0 percent of net sales, down 2.5 percentage
points from 2001. Excluding non-recurring charges, cost of sales for 2002 was
51.3 percent(#) of sales, down 1.5 percentage points from 2001. Gross margins
were positively impacted by improved plant efficiencies, lower raw material
costs and 3M's global sourcing initiative. In 2001, slowing worldwide market
demand and negative currency impacts reduced gross margins. Cost of sales
includes manufacturing, engineering and freight costs.
Selling, general and administrative (SG&A) expenses for 2002 were 22.8 percent
of net sales, down 2.3 percentage points from 2001. Excluding non-recurring
charges, SG&A expenses were 22.3 percent(#) of net sales, a decrease of
1.0 percentage point from 2001. Excluding non-recurring items, SG&A
spending totaled $3.643 billion(#) in 2002, a decrease of 2.5 percent
from 2001. This improvement in SG&A costs was the result of implementing
Six Sigma, indirect cost control programs (controlling those expenses not
directly associated with 3M products and services) and employment
reductions under the restructuring plan approved in June 2001. SG&A
also benefited by $67 million due to the cessation of goodwill amortization
and other indefinite-lived asset amortization effective January 1, 2002.
Excluding non-recurring charges in 2001, SG&A was 23.3 percent(#) of
sales, which was a decrease of three-tenths of one percentage point from
24
the prior year. This decrease in 2001 spending was due to cost
savings generated from 3M's indirect cost initiative and lower employment
levels.
Operating income:
Operating income is used by 3M as one of its primary business segment
performance measurement tools. Operating income excludes interest expense,
interest income, the provision for income taxes and minority interest.
Operating income in 2002 was 18.7 percent of net sales, compared with 14.2
percent in 2001. Excluding non-recurring charges, operating income in 2002 was
19.9 percent(#) of net sales, compared with 17.3 percent(#) in 2001. Although
the company faced continued economic weakness, operating income excluding non-
recurring items grew by $471 million, or 17.0 percent, from 2001. The cessation
of goodwill amortization and other indefinite-lived asset amortization
benefited operating income by $67 million, while currency impacts reduced
operating income by an estimated $60 million. Excluding non-recurring items,
2001 operating income totaled $2.777 billion(#), or 17.3 percent(#) of sales,
compared to 18.4 percent(#) of sales in 2000. This decrease was due to slowing
worldwide market demand, and negative currency effects. Excluding non-
recurring items, operating income margins in 2002 were 15.9 percent(#) in the
United States and 23.2 percent(#) internationally.
Interest expense and income:
Net interest expense (interest expense less interest income) in 2002 was $41
million, which was $46 million lower than the prior year. Interest expense was
$80 million in 2002, $124 million in 2001, and $111 in 2000. Declining rates
on floating-rate debt drove the reduction in expense in 2002. The increase in
2001 reflected higher average debt levels, partially offset by lower interest
rates. Interest income was $39 million in 2002, $37 million in 2001 and $27
million in 2000. The increase in both 2002 and 2001 interest income primarily
related to larger average cash balances.
Provision for income taxes:
The worldwide effective income tax rate for 2002 was 32.1 percent, the same as
2001. Excluding non-recurring items, the worldwide effective income tax rate
in 2002 was 32.5 percent(#), down from 32.9 percent(#) the prior year.
Excluding non-recurring items, the tax rate decrease compared to total year
2001 was primarily due to a lower average effective tax rate for international
operations. The effective tax rate in 2000 was 34.5 percent. The effective tax
rate decrease in 2001 when compared to 2000 related to the impact of recurring
tax credits on lower profit levels.
Minority interest:
Minority interest expense was $65 million in 2002, $54 million in 2001 and $92
million in 2000. Excluding non-recurring items, minority interest was $83
million(#) in 2002 and $62 million(#) in 2001. Minority interest represents the
elimination of the non-3M ownership interests, primarily in Sumitomo 3M Limited
and 3M Inter-Unitek GmbH (in 2002 and 2001 only). The increase in 2002 related
primarily to higher profits in Sumitomo 3M and 3M Inter-Unitek GmbH. The
decrease in 2001 was driven by lower profits in Sumitomo 3M. In 2003, 3M
expects lower minority interest expense. This reduction is expected due to the
purchase of the minority interest shares of 3M Inter-Unitek GmbH in December
2002 and the purchase of an additional 25 percent ownership interest in
Sumitomo 3M in early 2003. Refer to Note 3 in the Consolidated Financial
Statements for additional information on these acquisitions.
Net income:
Net income totaled $1.974 billion, or $4.99 per diluted share, compared
with $1.430 billion, or $3.58 per diluted share, in 2001, and $1.782 billion,
or $4.45 per diluted share, in 2000. Non-recurring charges negatively
impacted net income by $108 million, or 27 cents per diluted share,
in 2002, $312 million, or 78 cents per diluted share, in 2001, and
$90 million, or 23 cents per diluted share, in 2000. The cessation of
goodwill amortization and other indefinite-lived asset amortization
effective January 1, 2002, increased earnings per diluted share by 12 cents
in 2002. In 2002, 2001 and 2000, 3M estimates that currency effects reduced
net income by $35 million (8 cents per diluted share), $94 million (24 cents
per diluted share) and $55 million (14 cents per diluted share), respectively.
This estimate includes the effect of translating profits from local currencies
into U.S. dollars; the impact of currency fluctuations on the transfer of
goods between 3M operations in the United States and abroad; and transaction
gains and losses, including derivative instruments designed to reduce
25
foreign currency exchange rate risks. In 2002, derivative and other
transactions gains and losses decreased net income by $25 million.
Derivative and other transactions gains and losses increased net income by
$29 million in 2001 and increased net income by $21 million in 2000.
Employment:
At December 31, 2002, employment totaled 68,774 people, a decrease of 2,895
people from year-end 2001. Since March 31, 2001, employment has declined by
approximately 8,900 people, with 6,900 of the decline related to the
restructuring plan, and 3,500 of the decline due to the integration of
acquisitions and attrition. These decreases were partially offset by the
Corning Precision Lens, Inc. acquisition in the fourth quarter of 2002 that
added about 1,500 people. Sales per employee in local currencies increased
about 9 percent in 2002, decreased about 3 percent in 2001, and increased about
7 percent in 2000.
Operating initiatives:
The company will continue to press ahead with its five corporate initiatives
(Six Sigma, Global Sourcing Effectiveness, 3M Acceleration, Indirect Cost
Reduction and eProductivity) aimed at accelerating long-term top-line growth,
improving cash efficiency and lowering its total cost structure. Six Sigma
focuses on higher growth, lower costs and greater cash flow. Global Sourcing
Effectiveness generates savings through buying smarter, managing supply
agreements, geographic broadening and e-applications. 3M Acceleration
reallocates research and development resources to larger, more global projects.
Indirect Cost Reduction focuses on reducing costs not directly associated with
products or services. In eProductivity, 3M believes it has a significant
digitization opportunity. The company estimates that these initiatives
provided a combined benefit on a pre-tax basis of more than $500 million in
2002. In 2003, the company estimates these initiatives could contribute on
a pre-tax basis an additional $300 million compared to 2002. There can be no
assurance that all of the estimated cost savings from such activities will be
realized. 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.
Restructuring charges:
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 the significant actions to be taken and
obtained approvals from the appropriate level of management. In the fourth
quarter of 2001, the company obtained approvals for certain additional actions.
These actions were substantially completed by June 30, 2002.
In the first six months of 2002, 3M incurred $202 million of pre-tax expenses
relating to the restructuring plan. The 2002 charges relate to employee
severance and benefits ($111 million), accelerated depreciation ($47 million)
and other ($44 million). During 2001, 3M incurred $569 million of pre-tax
expenses principally related to the restructuring plan. The 2001 charges relate
to employee severance and benefits ($472 million), accelerated depreciation
($80 million) and other ($17 million). The company has not discontinued any
major product lines as a result of this restructuring.
In connection with its restructuring plan, the company eliminated a total of
about 6,900 positions. These positions represent a wide range of functions
throughout the company. Of the 6,900 employment reduction for the total plan,
about 45 percent occurred in the United States, 30 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. 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. In order
to enhance segment comparability and reflect management's focus on ongoing
operations, these restructuring costs have not been recorded in the individual
business segments.
26
Related to this restructuring plan, the company estimates it saved on a pre-
tax basis $300 million in 2002, in addition to the $80 million saved in 2001.
The company estimates an additional $120 million of incremental savings on a
pre-tax basis in 2003. The majority of the savings will be reduced employee
costs. The 2002 savings were spread across cost of sales, SG&A, and research,
development and related expenses. The 2001 savings were most prominent in
SG&A, with cost of sales benefits occurring in late 2001. 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.
Of the company's remaining current liability at December 31, 2002, $30 million
is classified in current liabilities (payroll) and $18 million is classified in
other current liabilities on the Consolidated Balance Sheet. The company
classified as long-term liabilities $43 million of its 2002 charges and $124
million of its 2001 charges. Special termination pension and medical benefits,
aggregating $43 million in 2002 and $62 million in 2001, were offered to
eligible employees. These benefits will generally be paid over their life
expectancies. In addition, of the $62 million in separation pay that was
deferred in 2001, $47 million was reclassified to current in 2002. The company
also recorded $3 million of non-cash stock option expense ($8 million in 2001)
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, while funding
for certain long-term special termination pension and medical liabilities will
be provided through established pension and postretirement trust funds. The
majority of the long-term portion of the liability, primarily special
termination pension and medical liabilities, is reflected as a component of
3M's pension and medical trust plans as a portion of the Accumulated Benefit
Obligation (ABO). It is estimated that 3M's benefit plans reflect
approximately $100 million of restructuring related long-term liabilities that
have not yet been paid out as of December 31, 2002.
Selected information related to these charges follows.
- ------------------------------------------------------------------------
Employee
Severance
and Accelerated
(Millions) Benefits Depreciation Other Total
- ------------------------------------------------------------------------
Charges
Year 2001 charges $472 $ 80 $ 17 $569
Year 2002 charges 111 47 44 202
- ------------------------------------------------------------------------
Total charges $583 $127 $61 $771
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Current liability at
December 31, 2000 $ -- $ -- $ --
- ------------------------------------------------------------------------
2001 Charges 472 80 17 569
2001 Cash payments (155) (4) (159)
2001 Non-cash and long-term
portion of liability (132) (80) -- (212)
- ------------------------------------------------------------------------
Current liability at
December 31, 2001 $185 $13 $198
- ------------------------------------------------------------------------
2002 Charges 111 47 44 202
2002 Cash payments (267) (39) (306)
2002 Reclassification from
long-term portion of liability 47 -- 47
2002 Non-cash and long-term
portion of liability (46) (47) -- (93)
- ------------------------------------------------------------------------
Current liability at
December 31, 2002 $ 30 $ 18 $ 48
- ------------------------------------------------------------------------
27
Accounting Pronouncements:
Financial Accounting Standards Board (FASB) Statement No. 142, "Goodwill and
Other Intangible Assets," (SFAS No. 142) was adopted by the company effective
January 1, 2002. Goodwill is subject to an impairment test at least annually.
The company's formal annual review of all goodwill in 2002 indicated that no
impairment existed. Indefinite-lived intangible asset impairments were not
material. Additional information regarding accounting pronouncements of the
FASB, including SFAS No. 142, is included in Note 1 to the Consolidated
Financial Statements.
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 the Consolidated Financial Statements. Non-recurring items in
2001 (that were not recorded in Corporate and Unallocated) included
acquisition-related costs totaling $23 million ($10 million recorded in Health
Care; $7 million in Transportation, Graphics and Safety; and $6 million in
Electro and Communications).
The company adopted EITF No. 00-25 effective January 1, 2002. This adoption
resulted in a reclassification of approximately $25 million of advertising
expenses from selling, general and administrative expenses to net sales for
2000 and 2001, with no impact on operating income. This reclassification
resulted in a reduction in both advertising expense and net sales for these
years. These reclassifications were reflected in the company's Consumer and
Office segment.
Effective July 1, 2002, the company also reclassified net sales and operating
income for the realignment of certain businesses from the Health Care segment
to the Consumer and Office segment. This alignment will best utilize 3M's
consumer and key account expertise to strengthen the position of certain brands
in the marketplace. These businesses had net sales of $118 million and
operating income of $7 million for total year 2001. This realignment had no
impact on total company net sales or operating income.
Transportation, Graphics and Safety Markets (23 percent of consolidated sales):
This market provides products for transportation safety, commercial graphics,
respiratory protection, optical display, automotive and personal safety.
Sales in 2002 totaled $3.840 billion, an increase of 8.9 percent from 2001.
Sales volumes were up 9.5 percent and pricing decreased six-tenths of a
percent. Operating income increased to $915 million, up nearly 32 percent on a
reported basis (up about 30 percent excluding non-recurring items in 2001). The
growth in both sales and operating income were driven primarily by optical film
products. In addition, the occupational health and automotive products also
contributed to the sales growth and operating income improvement. In December
2002, 3M completed the acquisition of Corning Precision Lens, Inc., a
manufacturer of lens systems for projection televisions. This acquisition will
add to the optical product offerings and will operate under the name 3M
Precision Optics, Inc. This business had 2002 net sales of approximately $270
million, but since this business was not acquired by 3M until December 2002,
there was minimal impact on 2002 sales and operating income of the
Transportation, Graphics and Safety Markets.
Health Care Markets (22 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 grew to $3.560 billion, an increase of $259
million, or 7.9 percent, from 2001. Sales volumes were up 6.9 percent and
pricing increased eight-tenths of one percent. Volume and price both were
negatively impacted by generic competition for 3M's branded Tambocor brand
pharmaceutical product. Translation had a positive two-tenths of a percent
impact on Health Care Market sales in 2002. Operating income increased to
$900 million, up 19.5 percent on a reported basis (up about 18 percent
excluding non-recurring items in 2001). 3M's medical supplies, dental
and pharmaceutical products led the sales and operating income growth.
In December 2002, 3M acquired the remaining 43 percent outstanding shares
of 3M Inter-Unitek GmbH (parent company of 3M ESPE Dental AG). Since
these results have been fully consolidated since 2001 (when 3M acquired
57 percent of this business), this additional acquisition of the remaining
28
shares had no impact on 2002 sales or operating income of the Health Care
Markets segment.
In the pharmaceutical business, an agreement was reached with Eli Lilly and
Company in September of 2001 to collaborate on resiquimod, an investigational
compound for the treatment of genital herpes. 3M received $100 million in the
fourth quarter of 2001 from Lilly in consideration for research and
development efforts. Revenue is recognized on a pro-rata basis over the
service period. 3M recognized $43 million of revenue relating to this
agreement in 2002 and $7 million of revenue in 2001. On February 24, 2003, 3M
jointly announced with Lilly suspension of clinical trials of resiquimod
because preliminary data from recently completed Phase III trials suggested
the dosing of resiquimod used in the studies would not achieve adequate
efficacy. The data did not indicate any safety concerns with the drug. 3M and
Lilly are working to determine whether to conduct additional clinical trials
on resiquimod for genital herpes. Meanwhile, the broader family of Immune
Response Modifiers (IRMs) continues to progress. On March 3, 2003, 3M
announced positive clinical results in pivotal Phase III studies of Aldara
brand (imiquimod) Cream 5%, an immune response modifier (IRM), for multiple
actinic keratoses (AK) and superficial basal cell carcinoma (sBCC). These
potentially serious skin conditions are a direct result of cumulative sun
exposure. With these Phase III results on Aldara, 3M Pharmaceuticals is on
schedule for mid-year 2003 FDA submissions of the supplemental new drug
applications.
Industrial Markets (20 percent of consolidated sales):
This market provides tapes, coated and nonwoven abrasives, and specialty
adhesives. Sales totaled $3.225 billion, an increase of eight-tenths of one
percent. Volume decreased 0.3 percent, reflecting continuing weakness in most
manufacturing sectors of the economy. Pricing increased 1.5 percent in 2002 and
translation negatively impacted sales by four-tenths of one percent. Operating
income increased to $563 million, an increase of about 8.5 percent, due to
effective cost control and increased efficiencies. Automotive aftermarket,
engineered adhesives, and industrial tape products all showed good sales growth
and operating income improvement. Coated abrasives and 3M's packaging systems
products were hardest hit by the weakness in the manufacturing sector of the
economy. During the third quarter of 2002, 3M finalized the acquisition of
certain assets and liabilities of Emtech Emulsion Technologies, Inc. and Emtech
Manufacturing Corporation. Acquisitions did not have a significant impact on
2002 sales for this segment (less than 1 percent), and did not materially
impact operating income.
Consumer and Office Markets (17 percent of consolidated sales):
The Consumer and Office segment serves markets that include consumer, office,
education, foodservice and other important markets. Sales in 2002 decreased
nine-tenths of one percent to $2.792 billion. Volumes decreased 1.6 percent in
2002. The decrease in volume reflected continued office worker lay-offs and
inventory contraction in the retail channel affecting office supplies.
Increased pricing had a positive two-tenths of one percent impact, and
translation increased sales by five-tenths of one percent. Operating income
increased to $514 million, up more than 13 percent for the year. Construction
and home improvement products posted strong sales growth and operating income
improvement for the year. 3M's home care and office supply products also
posted strong operating income improvement. Six Sigma and costs savings from
other 3M initiatives drove the operating income improvement.
Electro and Communications Markets (12 percent of consolidated sales):
This segment supplies connecting, splicing, insulating and protective products
for the electronics, communications and electrical industries. Sales in 2002
totaled $1.914 billion, down 11.9 percent from the prior year. Volumes were
down 11.3 percent in 2002. This decrease in volumes reflected overall softness
in the telecom markets. Pricing decreased sales by eight-tenths of one
percent, and translation increased sales by two-tenths of one percent.
Operating income increased to $265 million, up about 21.5 percent on a reported
basis (up about 18 percent excluding non-recurring items in 2001). Operating
income growth was broad-based, except for weakness in the Telecom markets.
29
Specialty Material Markets (6 percent of consolidated sales):
This segment provides high-value materials for demanding applications in
chemical processing, automotive, electronics, telecommunications and other
industries. Sales totaled $953 million in 2002, a decrease of 6.8 percent from
2001, primarily due to the phase-out of perfluorooctanyl chemistry used to
produce repellents and surfactant products. In addition, weaker sales in
electronics end-markets contributed to the decrease in sales. Volume decreased
7.7 percent in 2002. Pricing changes did not impact 2002 sales, and
translation increased sales by nine-tenths of one percent. Products in 3M's
industrial minerals and Dyneon operat