1

                          UNITED STATES
                SECURITIES AND EXCHANGE COMMISSION

                      Washington, D.C. 20549


                            FORM 10-Q

         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934



For Quarter ended September 30, 1998March 31, 1999    Commission file number: 1-3285



          MINNESOTA MINING AND MANUFACTURING COMPANY


State of Incorporation:  Delaware
                    I.R.S. Employer Identification No. 41-0417775

    Executive offices: 3M Center, St. Paul, Minnesota 55144

               Telephone number: (651) 733-1110



    Indicate  by check mark whether the Registrant  (1)  has
filed  all  reports required to be filed by  Section  13  or
15(d)  of  the  Securities Exchange Act of 1934  during  the
preceding  12  months (or for such shorter period  that  the
Registrant was required to file such reports), and  (2)  has
been  subject to such filing requirements for  the  past  90
days.  Yes   X  .  No      .


On  September 30, 1998,March  31, 1999, there were 401,345,869402,639,206  shares  of  the
Registrant's common stock outstanding.



               This document contains 3129 pages.
          The exhibit index is set forth on page 28.26.


  2


                              
       Minnesota Mining and Manufacturing Company and Subsidiaries

                     PART I.  Financial Information

                    Consolidated Statement of Income
             (Amounts in millions, except per-share amounts)
                              (Unaudited)
Three months ended Nine months ended September 30 September 30March 31 1999 1998 1997 1998 1997 Net sales $3,766 $3,826 $11,236 $11,357$3,776 $3,700 Operating expenses Cost of goods sold 2,190 2,173 6,448 6,4182,162 2,096 Selling, general and administrative expenses 947 952 2,838 2,861 Restructuring charge 332 -- 332 --965 924 Total 3,469 3,125 9,618 9,2793,127 3,020 Operating income 297 701 1,618 2,078649 680 Other income and expense Interest expense 37 23 106 7431 34 Investment and other income - net (8) (11) (13) (33) (44) Gain on divestiture - net (10) (803) (10) (803) Total 16 (793) 63 (773)23 23 Income before income taxes and minority interest 281 1,494 1,555 2,851626 657 Provision for income taxes 96 549 552 1,035225 237 Minority interest 7 18 39 6117 20 Net income $ 178384 $ 927 $ 964 $1,755400 Weighted average common shares outstanding 402.7 412.5 403.7 414.7402.3 404.4 Earnings per share - basic $ 0.44.95 $ 2.25 $ 2.39 $ 4.23.99 Weighted average common and common equivalent shares outstanding 406.7 419.2 408.7 420.9405.9 410.0 Earnings per share - diluted $ 0.44.95 $ 2.21 $2.36 $4.17.98 The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
3 Minnesota Mining and Manufacturing Company and Subsidiaries Consolidated Balance Sheet (Dollars in millions)
September 30, 1998(Unaudited) March 31, December 31, (Unaudited) 19971999 1998 Assets Current assets Cash and cash equivalents $ 204253 $ 230211 Other securities 177 24798 237 Accounts receivable - net 2,664 2,4342,647 2,666 Inventories Finished goods 1,324 1,2931,147 1,161 Work in process 636 605538 613 Raw materials and supplies 468 501407 445 Total inventories 2,428 2,3992,092 2,219 Other current assets 1,017 858966 985 Total current assets 6,490 6,1686,056 6,318 Investments 639 623 613 Property, plant and equipment 12,995 12,09813,275 13,397 Less accumulated depreciation (7,684) (7,064)(7,759) (7,831) Property, plant and equipment - net 5,311 5,0345,516 5,566 Other assets 1,541 1,4231,535 1,646 Total $13,965 $13,238$13,746 $14,153 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 878913 $ 898868 Payroll 466 306438 487 Income taxes 418 261 238 Short-term debt 1,696 1,4991,151 1,492 Other current liabilities 1,199 1,0421,062 1,278 Total current liabilities 4,500 3,9833,982 4,386 Other liabilities 2,155 2,3142,226 2,217 Long-term debt 1,426 1,0151,569 1,614 Stockholders' equity Common stock, $.50 par value, 472,016,528 shares issued 236 236 Capital in excess of par value 60 60 Retained earnings 10,121 9,980 Treasury stock, at cost (3,430) (3,482) March 31, 1999, 69,377,322 December 31, 1998, 70,092,280 Unearned compensation - ESOP (337) (350) Accumulated other comprehensive income Cumulative translation - net (702) (518) Debt and equity securities, unrealized gain - net 21 10 Total accumulated other comprehensive income (681) (508) Stockholders' equity - net 5,884 5,926 Shares outstanding September 30, 1998, 401,345,869 December 31, 1997, 404,724,947 ________ ________5,969 5,936 Total $13,965 $13,238$13,746 $14,153 The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
4 Minnesota Mining and Manufacturing Company and Subsidiaries Consolidated Statement of ChangesCash Flows (Dollars in Stockholders' Equity (Dollars and shares in millions, except per-share amounts)millions) (Unaudited)
Three months ended Nine months ended September 30 September 30March 31 1999 1998 1997 1998 1997 CommonCash Flows from Operating Activities Net income $ 384 $ 400 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 223 213 Implant litigation - net (30) (91) Working capital and other changes - net 251 (147) Net cash provided by operating activities 828 375 Cash Flows from Investing Activities Capital expenditures (289) (338) Other changes - net (40) (63) Net cash used in investing activities (329) (401) Cash Flows from Financing Activities Change in short-term debt - net (136) (55) Repayment of long-term debt (104) (20) Proceeds from long-term debt -- 333 Purchases of treasury stock (32) (187) Reissuances of treasury stock 67 127 Payment of dividends (225) (222) Net cash used in financing activities (430) (24) Effect of exchange rate changes on cash (27) -- Net increase (decrease) in cash and capital in excess of par valuecash equivalents 42 (50) Cash and cash equivalents at beginning of year 211 230 Cash and cash equivalents at end of period $ 296253 $ 296 $ 296 $ 296 Retained earnings Balance at beginning of period 10,081 9,061 9,848 8,756 Net income (A) 178 927 964 1,755 Dividends paid (per share: $0.55, $0.53, $1.65, $1.59) (221) (220) (666) (661) Stock option plans and other (13) (24) (121) (106) Balance at end of period 10,025 9,744 10,025 9,744 Accumulated other comprehensive income - net Balance at beginning of period Cumulative foreign currency translation adjustments (624) (302) (547) (178) Unrealized gain on securities - net 8 5 8 15 Other comprehensive income Foreign currency translation and other adjustments - net (B) 71 (92) (6) (216) Unrealized gain (loss) on securities - net (C) (3) 2 (3) (8) Balance at end of period Cumulative foreign currency translation adjustments (553) (394) (553) (394) Unrealized gain on securities - net 5 7 5 7 Balance at end of period (548) (387) (548) (387) Unearned compensation - ESOP Balance at beginning of period (360) (396) (379) (412) Amortization 10 8 29 24 Balance at end of period (350) (388) (350) (388) Treasury stock, at cost Balance at beginning of period (shares: 68.1, 56.5, 67.3, 55.2) (3,357) (2,315) (3,300) (2,193) Reacquired stock (shares: 3.1, 7.9, 7.3, 13.6) (229) (728) (606) (1,229) Issuances pursuant to stock option plans (shares: 0.5, 1.1, 3.9, 5.5) 47 102 367 481 Balance at end of period (3,539) (2,941) (3,539) (2,941) (shares: 70.7, 63.3, 70.7, 63.3) Stockholders' equity - net $ 5,884 $ 6,324 $ 5,884 $ 6,324 Total comprehensive income (A + B + C) $ 246 $ 837 $ 955 $ 1,531180 The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
5 Minnesota Mining and Manufacturing Company and Subsidiaries Consolidated Statement of Cash Flows (Dollars in millions) (Unaudited)
Nine months ended September 30 1998 1997 Cash Flows from Operating Activities Net income $ 964 $1,755 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 644 654 Asset impairment charges 161 -- Gain on divestiture - net (10) (803) Income tax payable relating to divestiture 4 308 Implant litigation - net (209) 130 Working capital and other changes - net (56) (386) Net cash provided by continuing operations 1,498 1,658 Net cash used by discontinued operations -- (92) Net cash provided by operating activities 1,498 1,566 Cash Flows from Investing Activities Capital expenditures (1,056) (1,002) Proceeds from National Advertising Company divestiture -- 1,000 Other changes - net (68) 37 Net cash (used) provided by investing activities (1,124) 35 Cash Flows from Financing Activities Change in short-term debt - net 145 (90) Repayment of long-term debt (52) (546) Proceeds from long-term debt 556 334 Purchases of treasury stock (606) (1,229) Reissuances of treasury stock 245 294 Payment of dividends (666) (661) Other (19) (22) Net cash used in financing activities (397) (1,920) Effect of exchange rate changes on cash (3) 42 Net decrease in cash and cash equivalents (26) (277) Cash and cash equivalents at beginning of year 230 583 Cash and cash equivalents at end of period $ 204 $ 306 The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
6 Minnesota Mining and Manufacturing Company and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) The interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. These adjustments consist of normal, recurring items, except for the restructuring charge recorded in the third quarter of 1998.items. The results of operations for any interim period are not necessarily indicative of results for the full year. The condensedinterim consolidated financial statements and notes are presented as permitted by the requirements for Form 10-Q and do not contain certain information included in the company's annual consolidated financial statements and notes. This Form 10-Q should be read in conjunction with the company's consolidated financial statements and notes included in its 19971998 Annual Report on Form 10-K. Restructuring Charge: 3M is rationalizing product lines that have marginal returns and/orPending Divestitures: The company has entered into agreements to sell Eastern Heights Bank, a decreasing strategic fit; consolidating some manufacturing operations;subsidiary banking operation, to Norwest Bank Minnesota (a subsidiary of Wells Fargo & Company), and identifying and eliminating lower-value activities. As a resultto sell the assets of these initiatives, by the endits Cardiovascular Systems business to Terumo Corp. of 1999, including personnel reductionsTokyo, Japan. These divestitures, expected to be finalized late in the second half of 1998, the company expects a total reduction of 4,500 employees. Inquarter or early in the third quarter of 1999, should generate cash proceeds (net of tax) of approximately $185 million. Restructuring Charge: In 1998, in connection with this plan to improve productivity and reduce costs, the company recorded a restructuring charge of $332$493 million ($214313 million after-tax). Major componentsafter tax), which is discussed in the 1998 Form 10-K. During the quarter ended March 31, 1999, the company terminated 688 employees under the plan. Because certain employees can defer receipt of this estimated charge include $161 million relatedtermination benefits for up to the write-down12 months, cash payments relate to both current and previous terminations. The restructuring liability as of certain assets to net realizable value, $102 million of employee severance and related costs, and $69 million relating to losses on business dispositions and other costs. These components are reflected on the consolidated balance sheet as a reduction in property, plant and equipment - net, and as accruals in payroll and other current liabilities, respectively. As of September 30, 1998, only minimal payments had been madeMarch 31, 1999, totaled $198 million. Selected information relating to the restructuring charge. The severancecharge follows.
Restructuring Employee Information Termination (Millions) Benefits Other Total Restructuring liability as of December 31, 1998 $232 $32 $264 1999 cash payments First quarter (65) (1) (66) Restructuring liability as of March 31, 1999 $167 $31 $198
6 Business Segments: Net sales and related costs componentoperating income by segment for the first quarter of the restructuring charge does not represent all1999 and first quarter of the amounts1998 follow.
Business Transportation, Segment Industrial Safety and Corporate Information and Specialty Health and Total (Millions) Consumer Material Care Unallocated Company Net sales First Quarter 1999 $1,922 $1,069 $768 $ 17 $3,776 First Quarter 1998 1,906 1,017 759 18 3,700 Operating income First Quarter 1999 $ 322 $ 207 $142 $(22)* $ 649 First Quarter 1998 314 192 151 23 * 680
Due to be recordedchanges in connection with the separation of the employees referred to above. The company expects additional charges relating to productivity improvementcost allocations among segments, total year 1998, 1997 and 1996 sales and operating income have been restated as the assessment of the employees impacted and communication of severance benefits to affected employees is finalized. Restructuring charges, including the third quarter 1998 charge, are expected to total about $500 million.follows.
Business Transportation, Segment Industrial Safety and Corporate Information and Specialty Health and Total (Millions) Consumer Material Care Unallocated Company Net sales 1998 $7,714 $4,126 $3,086 $ 95 $15,021 1997 7,774 4,202 3,004 90 15,070 1996 7,377 3,896 2,897 66 14,236 Operating 1998 $1,223 $ 719 $ 571 $ (474)* $ 2,039 income 1997 1,309 774 521 71 * 2,675 1996 1,194 778 545 (26)* 2,491 Assets** 1998 $5,185 $3,764 $2,168 $3,036 $14,153 1997 5,030 3,296 2,042 2,870 13,238 1996 4,771 3,129 2,012 3,452 13,364 Depreciation 1998 $ 446 $ 236 $ 161 $ 23 $ 866 and 1997 405 261 183 21 870 amortization 1996 425 270 160 28 883 Capital 1998 $ 676 $ 517 $ 221 $ 16 $ 1,430 expenditures 1997 581 563 217 45 1,406 1996 430 445 216 18 1,109 *Corporate and Unallocated operating income principally includes corporate investment gains and losses, certain derivative gains and losses, insurance related gains and losses, banking operations, restructuring charges and other miscellaneous items. Since this category includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis. Operating income for 1998 includes a $493 million restructuring charge. **Segment assets primarily include accounts receivable; inventory; property, plant and equipment - net; and other miscellaneous assets. Assets included in Corporate and Unallocated principally are cash and cash equivalents; other securities; insurance receivables; deferred income taxes; certain investments and other assets; and certain unallocated property, plant and equipment.
7 Derivatives and Hedging Activities: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The company must adopt this standard no later than January 1, 2000. The company is reviewing the requirements of this standard, which are quite complex. Although the company expects that this standard will not materially affect its financial position and results of operations, it has not yet determined the impact of this standard on its financial statements. Debt issuances: In October 1998, a Japanese subsidiary of the company, Sumitomo 3M Limited, completed a 5-year, 10 billion yen (approximately $85 million), 0.795 percent fixed rate private placement note. In July 1998, a German subsidiary of the company, 3M Deutschland GmbH, completed a 3-year, $200 million, 5.75 percent Eurobond offering. After giving effect to an interest rate swap, the company will have an interest obligation based on a floating LIBOR index. Comprehensive income: Effective January 1, 1998, the company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." Total comprehensive income and theThe components of accumulated othertotal comprehensive income are presented in the Consolidated Statement of Changes in Stockholders' Equity.shown below.
Total Comprehensive Income Three months ended March 31, (Millions) 1999 1998 Net income $ 384 $ 400 Other comprehensive income Cumulative translation - net $(184) $ (42) Debt and equity securities, unrealized gain (loss) - net 11 (1) Total comprehensive income $ 211 $ 357
Earnings per share: The difference in the weighted average shares outstanding for calculating basic and diluted earnings per share is attributable to the assumed exercise of the Management Stock Ownership Program (MSOP) stock options for the three-month and nine-month periods ended September 30, 1998March 31, 1999 and 1997. Effective July 1997, all General Employees' Stock Purchase Plan1998. MSOP options are exercised onto purchase 11.2 million shares of common stock at an average price of $91.59, which were outstanding at March 31, 1999, were not included in the last business daycomputation of each month of grant, resulting in nodiluted earnings per share because they would not have had a dilutive effect. Other: Discussion of legal matters is cross-referenced to this Form 10-Q, Part II, Item 1, Legal Proceedings, and should be considered an integral part of the Consolidated Financial Statements and Notes.interim consolidated financial statements. PricewaterhouseCoopers LLP, the company's independent auditors, have performed a review of the unaudited interim consolidated financial statements included herein and their review report thereon accompanies this filing. 8 Review Report of Independent Auditors To the Stockholders and Board of Directors of Minnesota Mining and Manufacturing Company: We have reviewed the accompanying condensed consolidated balance sheet of Minnesota Mining and Manufacturing Company and Subsidiaries as of September 30, 1998,March 31, 1999, and the related condensed consolidated statements of income and changes in stockholders' equity for the three-month and nine-month periods ended September 30, 1998 and 1997, and cash flows for the nine-monththree-month periods ended September 30, 1998March 31, 1999 and 1997.1998. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1997,1998, and the related consolidated statements of income, changes in stockholders' equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated February 9, 1998, except for the last paragraph under Debt in the Notes to Consolidated Financial Statements, as to which the date is February 18, 1998,8, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1997,1998, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP St. Paul, Minnesota October 22, 1998May 5, 1999 9 Minnesota Mining and Manufacturing Company and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS ThirdFirst Quarter Worldwide sales for the thirdfirst quarter totaled $3.766$3.776 billion, down 1.6up 2.1 percent from the thirdfirst quarter last year. Excluding changes in currency exchange rates, sales roseVolume increased about 2 percent. Worldwide volume andpercent, while selling prices were both up about 1 percent. Currency translation reduced worldwide sales by about 1 percent. Currency, while positive in the Asia Pacific area, was negative in other parts of the world, especially Latin America. In the United States, sales decreasedincreased about 12 percent to $1.892 billion. Adjusting for$1.768 billion, driven by volume increases. In Transportation, Safety and Specialty Material Markets, U.S. volume increased about 4 percent. Within this business segment, the third-quarter 1997 sale of the outdoor advertising business, sales rose about 1 percent. A number of U.S. businesses postedcompany saw good growth with gains in consumer, office,its commercial graphics, protective materials and safetyroofing granule businesses, and security businesses. The company experienced soft demanda pickup in businesses serving the electronics, transportation safety and industrial markets. In electronics, U.S. sales of several product lines -- including connectors, chip transport media, performance chemicals, and bonding systems -- were impacted by industry weakness, as well as by shifts in customer production to Asia. In transportation safety, the enactment of the new federal highway funding law has not yet translated into increased demand for reflective sheetings.products following a soft 1998. In Industrial and Consumer Markets, led by the consumer and office businesses, volume increased nearly 3 percent. Demand for certain industrial products, including tapes and abrasives, remained soft. Volume in the U.S. health care businesses declined about 3 percent from the year-earlier quarter. Sales of medical and dental products experienced good growth, but sales of pharmaceuticals declined due to the introduction of generic alternatives to a branded 3M expects benefits fromanalgesic. The largest effects of this new funding act to begin incompetition will extend through the third quarter of 1999. In industrial markets, abrasive, tape and other industrial businesses have been negatively affected by industry slowdowns. Internationally, sales totaled $1.874$2.008 billion. Overall, local- currencyVolume abroad increased about 2.5 percent, while selling prices were up about 2 percent, resulting in overall local-currency sales gains of about 5 percent, driven about equally between volume and selling prices, were more than offset by currency translation. Expressed in dollars, international sales declined 24.5 percent. The company increased selling prices in all major geographic areas, helping to offset part of the currency devaluation. Currency translation reduced international sales by about 72 percent. In Europe, volume increased about 3less than 1 percent. Good volume gainsSales were posted in Germany, Spain and in the Nordic region, but volume was up only 2 percent in France and was flat in the U.K. In Eastern Europe, where 3M has traditionally posted volume gains of about 20 percent, unit sales rose about 2 percent, impacted by economic slowing in Western Europe and by the spillover fromuncertainty in developing European countries. Also, the Russian economic instability.company is comparing against its strongest quarter in Europe last year. In the Asia Pacific area, volume was flat.increased about 7 percent, the company's best performance in five quarters. In Japan, unit sales rose 5 percent, despite the continuing recession, volume increased about 5 percent.economic weakness. In Asia outside Japan, volume declinedrose about 712 percent. 3M posted solid gains in Singapore and China, but was negatively affected by the economic turmoilexperienced sharp volume rebounds in Korea, Hong Kong, Thailand and Malaysia.Indonesia, and good growth in the China region. In Latin America, volume was roughly the same as in the first quarter last year. While unit sales increased 3more than 10 percent due to economic slowing brought about by the Asian and Russian instability. In Brazil and Argentinain Mexico, volume was flat for the quarter. In Mexico,in Argentina and unit sales declined about 7 percent in Brazil. The company increased selling prices in Latin America about 57 percent. Currency translation, largely due to Brazilian devaluation, reduced Latin American sales by about 20 percent. In Canada, volume increased about 11more than 10 percent. Worldwide, the Industrial and Consumer market sales and operating income growth was led by the consumer and office businesses. Transportation, Safety and Specialty Material segment sales and 10 operating income growth was led by films for laptop computers and other electronic displays, and by protective materials. Health Care showed good growth in medical and dental, but was hurt by declines in pharmaceuticals. Cost of goods sold, which includes manufacturing, research and development, and engineering, was 58.157.3 percent of sales, up 1.3seven- tenths of a percentage point from the first quarter last year. However, this was down more than 2 percentage points from the thirdfourth quarter last year.and was an improvement of more than half a percentage point from the rate the company averaged for 1998 as a whole. Gross margins benefited from higher selling prices and lower raw material costs. However,costs and the effects of currency exchange rates and low volume growth more than offset these benefits. Currency reduced gross margins by seven-tenths of a percentage point. The currency effect relates to the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad.company's restructuring actions. Selling, general and administrative spending was 25.225.5 percent of sales, up slightly as ahigher than the company's target. For the full year 1999, the company expects this spending to be below 25 percent of sales, helped by productivity gains stemming from restructuring actions, and by continuing spending discipline. Worldwide operating income was 17.2 percent of sales, down 1.2 percentage points from the first quarter last year. While lower than the first quarter last year, this represented an improvement from each of the past three quarters and from 1998 in total. In dollars, operating income declined 4.4 percent from the same quarter last year, but down $5 million. During the third quarter, 3M recorded a $332 million ($214 million after-tax) restructuring charge. Details of the restructuring charge are discussed in the Notes to Consolidated Financial Statements. The operating income discussion that follows excludes the restructuring charge. Worldwide operating income was 16.7 percent of sales, down 1.6 percentage points from the third quarter last year. Margins were down nearly 3 percentage points in the United States and four-tenths of a point internationally. Operating income was $629 million, down 10.3 percent from the year-earlier quarter. Currency reduced operating income by about $55 million, or 8 percent. ThirdFirst quarter interest expense of $37$31 million was up $14down $3 million from the same quarter last year, reflecting a moderate increase in the company's financial leverage.year. Net investment and other income was $11$8 million, in line with the level averaged in each of the past four quarters.recent trends. The third quarter of 1998 reflects a $10 million adjustment to finalize the accounting for the 1997 divestiture of National Advertising Company. The impact of the 1998 restructuring charge and the 1997 gain on divestiture on 3M's income statement and tax rate is summarized in the following table. 11 Supplemental Consolidated Statement of Income Information (Unaudited) (Millions, except per-share amounts) Three months ended
September 30, 1998 September 30, 1997 Excluding Restruc- Restruc- Excluding Gain on turing turing Reported Dives- Dives- Reported Charge Charge Total titure titure Total Operating income $ 629 $ (332) $ 297 $ 701 $ -- $ 701 Other income and expense 16 -- 16 10 (803) (793) Income before income taxes and minority interest $ 613 $ (332) $ 281 $ 691 $ 803 $ 1,494 Provision for income taxes 214 (118) 96 241 308 549 Effective tax rate 35.0% 35.5% 34.3% 35.0% 38.4% 36.8% Minority interest 7 -- 7 18 -- 18 Net income $ 392 $ (214) $ 178 $ 432 $ 495 $ 927 Earnings per share - diluted $ 0.97 $(0.53) $ 0.44 $ 1.03 $ 1.18 $ 2.21
Excluding the 1998 restructuring charge and the 1997 gain on divestiture, the worldwide effective income tax rate for the quarter was 35.036.0 percent, the same as in the third quarter last year. The 1998 restructuring charge was taxed at a rate of 35.5 percent. The 1997 gain on divestiture was taxed fully in the United States at a rate of 38.4 percent (federal statutory rate of 35.0 percent and a net effective state tax rate of 3.4 percent). This results in a total 3M combined effective tax rate of 34.3 percent for the third quarter, compared to 36.8 percent in the thirdfirst quarter last year. Net income totaled $178$384 million, or $0.44$.95 per diluted share, compared with $927$400 million, or $2.21$.98 per diluted share, in the thirdfirst quarter of 1997. Excluding the 1998 restructuring charge and the 1997 gain on divestiture, net income totaled $392 million, or $0.97 per diluted share, compared with $432 million, or $1.03 per diluted share, in the third quarter of 1997.1998. The company estimates that changes in the value of the U.S. dollar decreased earnings for the quarter by about 82 cents per share compared with the thirdfirst quarter of 1997. This estimate includes the effect of translating profits from local currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction gains and losses. Year-to-date On a year-to-date basis, worldwide sales totaled $11.236 billion, down about 1 percent from the same period last year. Excluding changes in currency exchange rates, sales rose about 3 percent. Unit sales increased about 2 percent, while selling prices were up about 1 percent. 12 In the United States, sales decreased slightly to $5.457 billion. Adjusting for the third-quarter 1997 sale of the outdoor advertising business, sales rose about 2 percent. Internationally, sales totaled $5.779 billion, with local-currency sales gains more than offset by currency translation. Expressed in dollars, international sales declined 2 percent. Volume increased about 5 percent and selling prices were up 2 percent. Currency translation reduced international sales by about 9 percent. Cost of goods sold, which includes manufacturing, research and development, and engineering, was 57.3 percent of sales, up eight- tenths of a percentage point from the same period last year. The factors that influenced gross margins for the third quarter were the same factors that affected the year-to-date results. Selling, general and administrative spending was 25.3 percent of sales, up slightly as a percent of sales from the same period last year, but down $23 million. The operating income discussion that follows excludes the restructuring charge. Worldwide operating income was 17.4 percent of sales, down nine-tenths of a percentage point from the same period last year. Margins were down 1.7 percentage points in the United States and down slightly internationally. Operating income was $1.950 billion, down 6.2 percent from the year-earlier period. Currency reduced operating income by about $200 million, or 10 percent. Interest expense of $106 million was up $32 million from the first nine months of last year, reflecting the company's strategy to lower its cost of capital by moderately increasing its financial leverage. This strategy may increase interest expense by about $50 million for total year 1998 when compared to 1997. Net investment and other income was $33 million, in line with recent trends. The impact of the 1998 restructuring charge and the 1997 gain on divestiture on 3M's income statement is summarized in the following table. 13 Supplemental Consolidated Statement of Income Information (Unaudited) (Millions, except per-share amounts) Nine months ended
September 30, 1998 September 30, 1997 Excluding Restruc- Restruc- Excluding Gain on turing turing Reported Dives- Dives- Reported Charge Charge Total titure titure Total Operating income $1,950 $ (332) $ 1,618 $ 2,078 $ -- $ 2,078 Other income and expense 63 -- 63 30 (803) (773) Income before income taxes and minority interest $1,887 $ (332) $ 1,555 $ 2,048 $ 803 $ 2,851 Provision for income taxes 670 (118) 552 727 308 1,035 Effective tax rate 35.5% 35.5% 35.5% 35.5% 38.4% 36.3% Minority interest 39 -- 39 61 -- 61 Net income $1,178 $ (214) $ 964 $ 1,260 $ 495 $ 1,755 Earnings per share - diluted $ 2.88 $(0.52) $ 2.36 $ 2.99 $ 1.18 $ 4.17
The worldwide effective income tax rate for the first nine months was 35.5 percent, the same as the tax rate (excluding the gain on divestiture) in the same period last year. Net income totaled $964 million, or $2.36 per diluted share, compared with $1.755 billion, or $4.17 per diluted share, in the first nine months of 1997. Excluding the 1998 restructuring charge and the 1997 gain on divestiture, net income totaled $1.178 billion, or $2.88 per diluted share, compared with $1.260 billion, or $2.99 per diluted share, in the first nine months of 1997. The company estimates that changes in the value of the U.S. dollar decreased earnings for the first nine months by about 29 cents per share compared with the same period in 1997.1998. This estimate includes the effect of translating profits from local currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction gains and losses. FUTURE OUTLOOK 3M expects higher fourth-quarter 1998 sales and earnings compared with the same quarter last year, excluding the impact of any additional restructuring charges taken in the fourth quarter of 1998. The company expects to take additional restructuring charges related to productivity improvement initiativesencountered a difficult set of challenges in the fourth quarter of 1998 and possibly into 1999, which would bring total restructuring charges to an estimated $500 million. Currency, due to purchased goods- large negative currency effects, is expected to reduce earningseconomic contractions in the fourth quarter of 1998 by about 5 cents per share. Results are expected to benefit from 3M's cost reduction efforts. 3M has an 8 percent annual productivity improvement objective, as measured by sales growth per employee in local currencies. Due to the turmoil in the Asia Pacific areamany international markets, and softness in a few key U.S. markets. To improve productivity and reduce costs, the company is exiting certain businessesproduct lines, consolidating manufacturing operations, and eliminating lower-value activities in corporate service functions. Relating to these actions, the company recorded a restructuring charge in 1998. This charge is discussed in the 1998 Form 10-K. 14 the United States, 1998 productivity will not meet the 8 percent target for the first time11 The company announced in 4 years.mid-1998, as part of its restructuring plan, its intent to reduce about 4,500 positions by December 31, 1999. The majority of these reductions are expected by September 30, 1999. During the third quarter, of 1998, employment declined approximately 1,100 people due to both the restructuring and attrition, bringing the total reductions thus far to 3,500 people. These reductions have been about 1,600 people, about 1,000 people excluding summer temporary workers. The company expects to reduce up to an additional 1,000 positionsequally divided between U.S. and international operations. When fully implemented by the end of 1998. By1999, the endrestructuring plan is expected to provide annual pre-tax savings of 1999, including personnel reductionsabout $250 million. The company anticipates implementation costs associated with this restructuring plan to be about $35 million in 1999. These costs, not included in the second half of 1998 restructuring charge, include expenses for relocating employees, inventory and equipment; unfavorable overhead variances; and other expenses. If the company does not generate adequate sales growth, normal increases in salaries and wages and additional depreciation from capital expenditures will create offsets to the annual savings. 3M expects a total reductionsales growth in 1999 of 4,500 employees. These actions should help4 to 5 percent in local currencies. Sales are expected to grow 3 to 4 percent in the United States. Sales growth in the U.S. is expected to pick up in the remaining three quarters of this year. Internationally, the company regainis expecting to increase sales in local currencies 5 to 6 percent. The company expects continuing reasonable volume growth in the Asia region. Asia appears to be slowly recovering and sustain its 8 percent productivity-the company will be comparing against quarters last year when many Asian economies were at their low points. In Japan, the company is not counting on any economic improvement, target.but expects to continue to do reasonably well because of continuing demand for certain proprietary 3M products. In Latin America, the volume picture is expected to improve as the year progresses. Latin America is expected to show continuing good growth in Mexico, along with gradual improvement in Brazil and Argentina. In Europe, comparisons will become easier in the coming quarters. While European economies are growing slowly, 3M anticipates slightly better growth than in the first quarter. The company is not able to project what the consequences will be from the turmoil in various economies around the world. The company is monitoring worldwide business conditions closely and will adjusts prices,is prepared to make adjustments in costs, pricing and investments as appropriate. Overall,Based on currency rates at the end of April 1999, the company has experienced earnings declines of about 20 percent in the Asia Pacific areaestimates that currency would reduce international sales for the first nine monthsyear by about 3 percent and would negatively impact earnings per share by 8 cents for the full year. Capital spending totaled $1.430 billion in 1998, and is expected to be in line with the company's target of 1998.$1.2 billion for 1999. The company does not expect a significant change in this situationits tax rate in the fourth quarter of 1998. 3M expects that the Latin American economies will continue to decelerate. 3M is also cautious about the near-term outlook for the U.S. and European economies. Given this scenario, 3M expects modest sales growth in the fourth quarter when compared with the same quarter last year. For total year 1998, the company expects to buy back about 9 million shares of 3M stock. This is expected to result in shares outstanding at year-end 1998, net of issuances, of about one percent less when comparing to year-end 1997 balances. IMPACT OF THE1999. 12 YEAR 2000 ISSUEREADINESS The Year 2000 issue is the result of using only the last two digits to indicate the year in computer hardware and software programs and embedded technology such as micro-controllers. As a result, these programs do not properly recognize a year that begins with "20" instead of the familiar "19." If uncorrected, such programs will be unable to interpret dates beyond the year 1999, which could cause computer system failure or other errors disrupting normal business operations. The company recognizes the importance of readiness for the Year 2000 issue and has given it high priority. In November 1996, the company created a corporate-wide Year 2000 project team representing all company business and staff units. The team's objective is to ensure an uninterrupted transition to the year 2000 by assessing, testing and modifying products and IT and non-IT systems (defined below) and date- sensitive company products so that (a) they will perform as intended, regardless of the date (before, during and after December 31, 1999), and (b) dates (before, during and after December 31, 1999 and including February 29, 2000) can be processed with expected results ("Year 2000 Compliant"). The scope of the Year 2000 compliance effort includes (i) information technology ("IT") such as software and hardware; (ii) non-IT systems or embedded technology such as micro-controllersmicro- controllers contained in various manufacturing and lab equipment,laboratory equipment; environmental and safety systems, facilities and utilities, and(iii) date-sensitive company products; and (iii)(iv) the readiness of key third parties, including suppliers and customers, and the electronic data interchange (EDI) with those key third parties. 15 The Year 2000 project team has taken an inventory of products and IT and non-IT systems or componentsand date-sensitive company products that might malfunction or fail atas a result of using only the end oflast two digits to indicate the millennium.year. The project teams then categorized the potential date component failures into three categories: "Vital" (stops the business operation and no short-term solution is available); "Critical" (inconvenient to the business operation and a short-term solution is available); and "Marginal" (inconsequential to the business operation). IT Systems - The company is using both internal and external resources to remediate and test millions of lines of application software code. As of September 30, 1998,March 31, 1999, approximately 95%(i) 98 percent of the core central IT application systems (e.g., general ledger, payroll, procurement and order management), (ii) 92 percent of central IT infrastructure systems (e.g., telecommunications, electronic mail, databases, data centers, and system software), and (iii) 84 percent of the other IT systems (e.g., systems that support business and staff organizations) located in the United States that are deemed "Vital" andor "Critical" are believed to be Year 2000 Compliant. As of September 30, 1998,March 31, 1999, approximately 75%98 percent of the IT systems in subsidiaries outside the United States that are deemed "Vital" andor "Critical" are believed to be Year 2000 Compliant. 13 Non-IT Systems - The company has overmore than 100 manufacturing and lablaboratory locations worldwide with varying degrees of non-IT systems (such as programmable logic controllers, gauging guidance and adjustment systems and testing equipment). Assessment and testing of non-IT systems for Year 2000 compliance has proven much more difficult than assessing compliance of IT systems. Compliancesystems because testing of non-IT systems often requires shutdown of the manufacturing operations. To minimize these disruptions,As a result, the company has contactedapproached assessment and testing of non- IT systems that are common to many of the company's facilities by (i) contacting the suppliers of these non-IT systems used inand obtaining statements that the company's facilities and obtained statements on whether the system issystems are Year 2000 Compliant. The company has relied on such vendor statementsCompliant, and tested(ii) testing components of non-IT systems wherewhen they are shut down for normal maintenance. The company has also shut down manufacturing lines in three of its facilities and tested non-IT systems that are common to many of the testing does not interrupt manufacturing operations.company's facilities. These tests demonstrate that "time intervals" instead of "dates" are used almost exclusively in these non-IT systems and support the company's belief that potential disruptions of such systems due to the Year 2000 issue should be minimal. As of September 30, 1998,March 31, 1999, approximately 75%93 percent of the non-IT systems located in the United States that are deemed "Vital" andor "Critical" and approximately 65%97 percent of the non-IT systems in subsidiaries outside the United States that are deemed "Vital" andor "Critical" are believed to be Year 2000 Compliant. Third Parties - In addition to internal Year 2000 IT and non-IT remediation activities, the company is in contact with key suppliers and electronic commerce customers to minimize disruptions in the relationship between the company and these important third parties from the Year 2000 issue. While the company cannot guarantee compliance by third parties, the company will consider alternate sources of supply in the event a key supplier cannot demonstrate its systems or products are Year 2000 Compliant. Contingency Planning - The primary focus of the Year 2000 project teams has been directed at making the company's IT and non-IT systems and products Year 2000 Compliant. The company is working on contingency plans specifying what the company will do if failures occur in its IT and non-IT systems or important third parties are not 16 Year 2000 Compliant. The company expects to have such contingency plans finalized by March 31, 1999 for its IT and non-IT systems and by April 30, 1999 for its key suppliers. Company Products - The vast majority of the company's products are not date-sensitive. The company has collected information on current and discontinued date-sensitive products. The company's website (http://www.3M.com) contains a section dedicated to communicating year 2000 information to its customers. This information is availablewebsite includes a search feature to enable customers as of the date of this filing. Coststo determine whether certain 3M products are Year 2000 compliant. Third Parties - Through September 30, 1998,In addition to internal Year 2000 IT and non-IT remediation activities, the company had expensed incremental costs of $41 millionis in contact with key suppliers, contract manufacturers and electronic commerce customers to minimize potential disruptions in the relationships between the company and these important third parties related to the Year 2000 issue. The assessment process includes (i) initial survey, (ii) risk assessment and contingency planning, and (iii) follow-up reviews. The company has also categorized supplies purchased from vendors into three categories: "Vital" (disruption of supply stops the business operation and no short-term solution is available); "Critical" (disruption of supply is inconvenient to the business operation and a short-term solution is available); and "Marginal" (disruption of supply is inconsequential to the business operation). The company has focused its efforts on those vendors that supply goods or services deemed "Vital" to the company's business. The company has received responses to its initial year 2000 readiness survey from most of its 14 "Vital" suppliers indicating that the suppliers are working on the year 2000 issue. While the company cannot guarantee compliance by third parties, the company is developing contingency plans with its key suppliers that include the availability of appropriate inventories of supplies in the event the supplier is not Year 2000 Compliant. Risks and Worst Case Scenarios - The company believes that its most reasonably likely worst case scenarios regarding the year 2000 issue involves the IT and non-IT systems of third parties rather than the IT and non-IT systems and products of the company. Because the company has far less control over assessing the year 2000 readiness of certain third parties, the company believes the risks are greatest with suppliers of electrical, telecommunications, and transportation services, particularly suppliers of such services located outside the United States. Contingency planning regarding the failure of such services involves maintaining appropriate inventories of key raw materials and products. Contingency Planning - The company is preparing contingency plans specifying what the company will do if failures occur in IT and non- IT systems, or important third parties are not Year 2000 Compliant. The process includes identifying and prioritizing risks, assessing the business impact of those risks, creating notification procedures, and preparing written contingency plans for those failures with the greatest risk to the company. As of March 31, 1999, the company's contingency plans were 75% complete for its IT and non-IT systems and 100% complete for its key suppliers. Costs - Through March 31, 1999, the company had spent approximately $55 million out of a total remaining incremental cost is estimatedestimate of $77 million related to be approximately $34 million.Year 2000 readiness issue. These costs include the costs incurred for external consultants and professional advisors and the costs for software and hardware. The company's process for tracking internal costs does not capture all of the costs incurred for each of the teams working on the Year 2000 project. Such internal costs are principally the related payroll costs for its information systems group and other employees working on the Year 2000 project. The company is expensing as incurred all costs related to the assessment and remediation of the Year 2000 issue. These costs are being funded through operating cash flows. The company's total cost for the Year 2000 issue includes estimated costs and time associated with interfacing with third parties' Year 2000 issues. These estimates are based on currently available information. The company's current estimates of the amount of time and costs necessary to remediate and test its computer systems are based on the facts and circumstances existing at this time. The estimates were made using assumptions of future events including the continued availability of certain resources, such as skilled IT personnel and infrastructure (e.g., electrical supply and water and sewer service), telecommunications, transportation supply chains, critical suppliers of materials, and Year 2000 modification plans and implementation success by key third-parties, and other factors.third-parties. New developments may occur that could affect the company's estimates of the amount of time and costs needed to modify and test its IT and non- ITnon-IT systems for Year 2000 compliance.compliance and, depending on the year 2000 readiness of certain third parties, could 15 affect the company's ability to conduct its business. These developments include, but are not limited to: (i) the availability and cost of personnel trained in this area; (ii) the ability to locate and correct all relevant date-sensitive codescode in both IT and non-IT systems; (iii) unanticipated failures in its IT and non-IT systems; and (iv) the planning and Year 2000 compliance success that key customers and suppliers attain.attain; (v) failure or collapse of infrastructure (e.g., disruptions of electrical supply and water and sewer service), telecommunications, transportation supply chains, and critical suppliers of materials, particularly those suppliers of such services and goods located outside the United States; (vi) unforeseen product shortages due to hoarding of critical raw materials. The company cannot determine the impact of these potential developments on the current estimate of probable costs of making its products and IT and non-IT systems Year 2000 Compliant.Compliant or the financial impact on the company. Accordingly, the company is not able to estimate its possible future costs beyond the current estimate of costs.estimates. As new developments occur, these cost estimates may be revised to reflect the impact of these developments on the costs to the company of making its products and IT and non-IT systems Year 2000 Compliant. Such cost revisions in costs could have a material adverse impact on the company's net income in the quarterly period in which they are recorded. Although the company considers it unlikely, such revisions could also have a material adverse effect on the consolidated financial position or annual results of operations of the company. Various of the company's disclosures and announcements concerning its products and year 2000 programs are intended to constitute "Year 2000 Readiness Disclosures" as defined in the recently enacted Year 2000 Information and Readiness Disclosure Act. The Act provides added protection from liability for certain public and private statements concerning an entity's year 2000 readiness and the year 2000 readiness of its products and services. The Act also potentially provides added protection from liability for certain types of year 2000 disclosures made after January 1, 1996 and before the date of enactment of the Act. THE EURO CONVERSION On January 1, 1999, eleven11 of the fifteen15 member countries of the European Union (EU) will establishestablished fixed conversion rates through the European Central Bank (ECB) between their existing local currencies and the Euro,euro, the EU's futurenew single currency. The participating 17 countries havehad agreed to adopt the Euroeuro as their common legal currency on that date. The Euro will then tradeFrom that date, the euro is traded on currency exchanges and beis available for non-cash transactions. Following introduction of the Euro, theeuro, local currencies will remain legal tender between January 1, 1999 and January 1, 2002.until December 31, 2001. During thethis transition period, goods and services may be paid for using eitherwith the Euroeuro or the local currency under the EU's "no compulsion, no prohibition" principle. If cross-border payments are made in a local currency during this transition period, the amount will first be converted into the Euroeuros and then converted from the Euroeuros into the second local currency at the rates fixed by 16 the ECB. BeginningBy no later than January 1, 2002,December 31, 2001, the participating countries will issue new Euro-denominatedeuro-denominated bills and coins for use in cash transactions. By no later than July 1, 2002, the participating countries will withdraw all bills and coins denominated in local currencies, making conversion to the Euroeuro conversion complete. In February 1997, the company created a European Monetary Union (EMU) Steering Committee and project teams representing all company business and staff units in Europe. The teams'common objective of these teams is to ensure a smooth transition to EMU for the company and its constituencies. The scope of the teams' efforts includes (i) assessing the Euro'seuro's impact on the company's business and pricing strategies for customers and suppliers, and (ii) ensuring that the company's business processes and information technology (IT) systems can process transactions in Euroseuros and local currencies during the transition period and achieve the conversion of all relevant local currency data to the Euroeuro by January 1, 2002December 31, 2001, in the participating countries. Europe is a significantThe European market for the company, contributing 24%contributed 26% of consolidated sales and 16%20% of consolidated operating income, excluding the restructuring charge, in 1997.1998. The company believes that the Euroeuro will, over time, create increasedincrease price competition for the company's products across Europe due to cross-border price transparency. The company also believes that the adverse effects of increased price competition will be offset to some extentsomewhat by new business opportunities and efficiencies in what will become the world's second largest economy.efficiencies. The company, however, is not able to estimate the anticipated net long-term impact of the euro introduction of the Euro on the company. The company has consolidated its IT operations and made significant investments in its IT systems in Europe over the past few years in anticipation of the EMU. The company expects that these investments will enable the company to manage customer orders, invoices, payments and accounts in Euroseuros and in local currencies according to customer needs by January 1, 1999. Duringduring the three-year transition period. During this period, the company anticipates spending approximately $25$35-50 million to complete the conversion to the Euro. The company has not developed contingency plans at this time sinceeuro. Because the company believes its IT systems will be ready by January 1, 2002December 31, 2001 for the Euro conversion.euro conversion, it has not developed contingency plans at this time. The euro introduction of the Euro is not expected to have a material impact on the company's overall currency risk. Although the company engages in significant trade within the EU, the impact todayto date of changes in currency exchange rates on the trade within the EU has not 18 been material. The company anticipates the Euroeuro will simplify financial issues related to cross-border trade in the EU and reduce the transaction costs and administrative time necessary to manage this trade and related risks. The company believes however, that the associated savings will not be material to corporate results. The company does havehas derivatives outstanding beyond January 1, 1999, in several of the European local currencies. Under the EU's "no compulsion, no prohibition" principle, the outstanding derivative positions will either mature as local currency contracts or convert to Euroeuro contracts at no additional economic cost to the company. The company 17 believes that systems used to monitor derivative positions can be appropriately modified for these changes. The company believes the impact of the euro introduction of the Euro on the company's derivative positions will not be material. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. This Quarterly Report on Form 10-Q contains forward-looking statements, which reflect the Company'scompany's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below,here, which could cause actual results to differ materially from historical results or those anticipated. The words "aim," "believe," "expect," "anticipate," "intend," "estimate," "will," "should," "could" and other expressions whichthat indicate future events and trends identify forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to: foreign exchange rates and fluctuations in those rates; the effects of, and changes in, worldwide economic conditions; the timing and market acceptance of new product offerings; raw materials, including shortages and increases in the costs of key raw materials; the impact of the Year 2000 issue; and legal proceedings (see discussion of Legal Proceedings in Part II, Item 1 of this Form 10-Q). FINANCIAL CONDITION AND LIQUIDITY The company's financial condition and liquidity remain strong. Working capital decreased $195increased $142 million to $1.990$2.074 billion at September 30, 1998,March 31, 1999, compared to $2.185with $1.932 billion at year-end 1997.1998. The accounts receivable average days' sales outstanding was 5760 days, down slightly from year-end. The company's key inventory index was 3.83.3 months, unchangeddown from 3.4 months at year-end. The company's current ratio was 1.4, down1.5, up from 1.51.4 at year-end. Total debt increased $608decreased $386 million from year-end 19971998 to $3.122$2.720 billion. In line with the company's strategy to lower its cost of capital, total debt increased from an average of about $2 billion in 1997 to $3.122 billion as of September 30, 1998. As of September 30, 1998,March 31, 1999, total debt was 3531 percent of total capital. 19 The company's strong credit rating provides ready and ample access to funds in global capital markets. In February 1998, the parent company issued $330 million of 30-year, 6.375 percent debentures. In July 1998, a German subsidiary of the company, 3M Deutschland GmbH, completed a 3-year, $200 million, 5.75 percent Eurobond offering. In October 1998, a Japanese subsidiary of the company, Sumitomo 3M Limited, completed a 5-year, 10 billion yen (approximately $85 million), 0.795 percent fixed rate private placement note. At September 30, 1998,March 31, 1999, the company had available short-term lines of credit totaling about $600$670 million. Net cash provided by operating activities from continuing operations totaled $1.498 billion$828 million in the first ninethree months of the year, down $160up $453 million from the same period last year. The first quarter of 1999 was helped by good working capital management. Inventories declined by about $390 million, or 16 percent, when compared to the first quarter of 1998. Working capital and other changes in 1999 include a $65 million use of cash for the 18 impact of the employee termination benefits paid in connection with the restructuring charge. Net cash outflows from mammary implant litigation were $339$61 million higherlower than in the same period last year. Asset impairment chargesDuring the second quarter of $1611999, the company expects to receive more than $200 million relateof insurance recoveries related to the third quarter 1998 restructuring and represent the write-down of certain assets to net realizable value. Working capital and other changes in 1998 includes the impact of the employee severance and business disposition components of the restructuring charges.product claims. Timing differences between payment of implant liabilities and receipt of related insurance recoveries could affect the cash flows of future periods. This is discussed in Part II, Item 1, Legal Proceedings, of this Form 10-Q. Net cash used by operating activities from discontinued operations was $92 million in the first nine months of 1997. Payments made in 1997 were primarily severance payments related to discontinued operations. Cash used in investing activities was $1.124 billion$329 million in the first ninethree months of the year, compared to cash provided of $35with $401 million in the same period last year. In 1997, cash proceeds related to the sale of National Advertising Company totaled $1 billion. Capital expenditures for the first ninethree months of 19981999 were $1.056 billion, an increase$289 million, a decrease of 5.5about 15 percent when compared with the same period last year. The company expects to receive cash proceeds (net of tax) in the second or third quarter of 1999 of approximately $185 million relating to its pending divestitures of Eastern Heights Bank and the Cardiovascular Systems business. Treasury stock repurchases for the first ninethree months of 19981999 were $606$32 million, compared with repurchases in the same period last year of $1.229 billion. In the third quarter of 1997, net proceeds from the National Advertising Company divestiture were primarily used to repurchase shares and to reduce short-term debt.$187 million. Financing activities for both short-term and long-termlong- term debt provided net cash inflowsoutflows of $649$240 million, compared with net cash outflowsinflows of $302$258 million in the first ninethree months last year. The company repurchased about 7.3 million400,000 shares of common stock in the first ninethree months of 1998,1999, compared with 13.62.2 million shares in the same period last year. In November 1997,February 1999, the Board of Directors authorized the repurchase of up to 2512 million shares of 3M common stock through December 31, 1998.1999. As of September 30, 1998, 15.3March 31, 1999, 11.6 million shares remained authorized for repurchase. Stock repurchases are made to support employee stock purchase plans and for other corporate purposes. 20 Cash dividends paid to shareholders totaled $666$225 million in the first ninethree months of this year, compared with $661$222 million in the same period last year. In February 1998,1999, the quarterly dividend was increased to 5556 cents a share. Legal proceedings are discussed in the Legal Proceedings section in Part II, Item 1, of this Form 10-Q. There can be no certainty that the company may not ultimately incur charges, whether for governmental proceedings and claims, products liability claims, environmental proceedings or other actions, in excess of presently established accruals. While such future charges could have a material adverse impact on the company's net income in the quarterly period in which they are recorded, the company believes that such additional charges, if any, would not have a material adverse effect on the consolidated financial position or annual results of operations of the company. (NOTE: The preceding sentence applies to all legal proceedings involving the company except the breast implant litigation. See discussion of breast implant litigation in Legal Proceedings, Part II, Item 1.) The company expects to complete the refinancing of its Employee Stock Ownership Plan in late 1998 or early 1999, which would result in an estimated $40 million after tax charge (estimated $0.10 per diluted share). This would be reported as an extraordinary loss from early extinguishment of debt. 2119 Minnesota Mining and Manufacturing Company and Subsidiaries PART II. Other Information Item 1. Legal Proceedings The company and certain of its subsidiaries are named as defendants in a number of actions, governmental proceedings and claims, including environmental proceedings and products liability claims involving products now or formerly manufactured and sold by the company. In some actions, the claimants seek damages as well as other relief, which, if granted, would require substantial expenditures. The company has accrued certain liabilities, which represent reasonable estimates of its probable liabilities for these matters. The company also has recorded receivables for the probable amount of insurance recoverable with respect to these matters. Some of these matters raise difficult and complex factual and legal issues, and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular action, the jurisdiction and forum in which each action is proceeding and differences in applicable law. Accordingly, the company is not always able to estimate the amount of its possible future liabilities with respect to such matters. There can be no certainty that the company may not ultimately incur charges, whether for governmental proceedings and claims, products liability claims, environmental proceedings or other actions, in excess of presently established accruals. While such future charges could have a material adverse impact on the company's net income in the quarterly period in which they are recorded, the company believes that such additional charges, if any, would not have a material adverse effect on the consolidated financial position or annual results of operations of the company. (NOTE: The preceding sentence applies to all legal proceedings involving the company except the breast implant litigation, which is discussed separately in the next section). Breast Implant Litigation As of September 30, 1998,March 31, 1999, the company had been named as a defendant, often with multiple co-defendants, in 6,9295,488 lawsuits and 144121 claims in various courts, all seeking damages for personal injuries from allegedly defective breast implants. These claims and lawsuits purport to represent 22,75720,060 individual claimants. It is not yet certain how many of these lawsuits and claims involve products manufactured and sold by the company, as opposed to other manufacturers.manufacturers, or how many of these lawsuits and claims involve individuals who accepted benefits under the Revised Settlement Program (as defined below). The company has confirmed that approximately 1,000 individuals who opted out of the class action have 3M implants. The company entered the business of manufacturing breast implants in 1977 by purchasing McGhan Medical Corporation. In 1984, the company sold the business to a corporation that also was named McGhan Medical Corporation. 2220 The typical claim or lawsuit alleges the individual's breast implants caused one or more of a wide variety of ailments and local complications, including, but not limited to, non-specific autoimmune disease, scleroderma, lupus, rheumatoid arthritis, fibromyalgia, mixed connective tissue disease, Sjogren's Syndrome, dermatomyositis, polymyositis and chronic fatigue. Plaintiffs in these cases typically seek monetary damages, often in unspecified amounts, and also may seek certain types of equitable relief, including requiring the company to fund the costs associated with removal of the breast implants. A number of breast implant claims and lawsuits seek to impose liability on the company under various theories for personal injuries allegedly caused by breast implants manufactured and sold by manufacturers other than the company. These manufacturers include, but are not limited to, McGhan Medical Corporation and manufacturers that are no longer in business or that are insolvent, whose breast implants may or may not have been used in conjunction with implants manufactured and sold by the company. These claims raise many difficult and complex factual and legal issues that are subject to many uncertainties, including the facts and circumstances of each particular claim, the jurisdiction in which each suit is brought, and differences in applicable law and insurance coverage. A number of breast implant lawsuits seek to recover punitive damages. Any punitive damages that may be awarded against the company may or may not be covered by certain insurance policies depending on the language of the insurance policy, applicable law and agreements with insurers. In addition to individual suits against the company, a class action on behalf of all women with breast implants filed against all manufacturers of such implants has been conditionally certified and is pending in the United States District Court for the Northern District of Alabama (the "Court")(DANTE, ET AL., V. DOW CORNING, ET AL., U.S.D.C., N. Dist., Ala., 92-2589; part of IN RE: SILICONE GEL BREAST IMPLANT PRODUCT LIABILITY LITIGATION, U.S.D.C., N. Dist. Ala., MDL 926, U.S.D.C., N. Dist. Ala., CV 92-P-10000-S; now held in abeyance pending settlement proceedings in the settlement class action LINDSEY, ET AL., V. DOW CORNING CORPORATION, ET AL., U.S.D.C., N. Dist., Ala., CV 94-P-11558-S). Class actions, some of which have been certified, are pending in various state courts, including, among others, Louisiana, Florida and Illinois, and in the British Columbia courts in Canada. The Louisiana state court action (SPITZFADEN, ET AL., v. DOW CORNING CORPORATION, ET AL., Dist. Ct., Parish of Orleans, 92-2589) has been decertified by the trial court. Plaintiffs' writ for an emergency appeal from the decertification has been denied by the Louisiana Supreme Court. A normal appeal remains pending. 21 The company also has been served with a purported class action brought on behalf of children allegedly exposed to silicone in utero 23 and through breast milk. (FEUER, ET AL., V. MCGHAN, ET AL., U.S.D.C., E. Dist. NY, 93-0146.) The suit names all breast implant manufacturers as defendants and seeks to establish a medical- monitoring fund. On December 22, 1995, the Court approved a revised class action settlement program for resolution of claims seeking damages for personal injuries from allegedly defective breast implants (the "Revised Settlement Program"). The Revised Settlement Program is a revision of a previous settlement pursuant to a Breast Implant Litigation Settlement Agreement (the "Settlement Agreement") reached on April 8, 1994, and approved by the Court on September 1, 1994. The Court ordered that, beginning after November 30, 1995, members of the plaintiff class may choose to participate in the Revised Settlement Program or opt out, which would then allow them to proceed with separate products liability actions. The Revised Settlement Program as supplemented now includes both foreign and domestic class members with implants manufactured by certain manufacturer defendants, including Baxter International, Bristol Meyers-Squibb,Bristol-Myers Squibb Company, the company and McGhan Medical Corporation. The company's obligations under the Revised Settlement Program are limited to eligible claimants with implants manufactured by the company or its predecessors ("3M implants") or manufactured only by McGhan Medical Corporation after its divestiture from the company on August 3, 1984 ("Post 8/84 McGhan implants"). With respect to foreign claimants and claimants with only Post 8/84 McGhan implants (or only Post 8/84 McGhan implants plus certain other manufacturers' implants), the benefits are more limited than for domestic claimants with 3M implants. Post 8/84 McGhan implant benefits are payable in fixed shares by the company, Union Carbide Corporation and McGhan Medical Corporation. McGhan Medical Corporation has defaulted on its fixed share obligation (which does not affect 3M's obligation to pay its share) and has a request for a mandatory class action recently approved by the Court. In general, the amounts payable to individual current claimants (as defined in the Court's order) under the Revised Settlement Program, and the company's obligations to make those payments, willare not be affected by the number of class members electingwho have elected to opt out of the Revised Settlement Program or the number of class members making claims under the Revised Settlement Program. In addition to certain miscellaneous benefits, the Revised Settlement Program provides for two compensation options for current claimants with 3M implants. Under the first option, denominated as Fixed Amount Benefits, current claimants with 3M implants who satisfy disease criteria established in the prior Settlement Agreement will receive amounts ranging from $5,000 to $100,000, depending on disease severity or disability level; whether the claimant can establish that her implants have ruptured; and whether the claimant also has had implants manufactured 22 by Dow Corning. Under the second option, denominated as Long-Term Benefits, current claimants with 3M implants who satisfy more restrictive disease and severity criteria specified under the Revised Settlement Program can receive benefits ranging from $37,500 to $250,000. 24 In addition, current claimants with 3M implants are eligible for (a) a one-time payment of $3,000 upon removal of 3M implants during the course of the class settlement, and (b) an advance payment of $5,000 against the above referenced benefits upon proof of having 3M implants and upon waiving or not timely exercising the right to opt out of the Revised Settlement Program. Current claimants with only Post 8/84 McGhan implants (or only Post 8/84 McGhan implants plus certain other manufacturers' implants) are eligible only for benefits ranging from $10,000 to $50,000. Eligible participants with 3M implants who did not file current claims but are able to satisfy the more restrictive disease and severity criteria during an ongoing period of 15 years will be eligible for the Long-Term Benefits, subject to certain funding limitations. Such participants also will be eligible for an advance payment of $1,000 upon proof of having 3M implants and upon waiving or not timely exercising the right to opt out of the Revised Settlement Program or, as an elective option expiring on June 15,1999,15, 1999, a payment of $3,500 in full settlement of all breast implant claims including any claim for Long-Term Benefits under the Revised Settlement Program. Benefit levels for eligible participants who are not current claimants and have only Post 8/84 McGhan implants (or only Post 8/84 McGhan implants plus certain other manufacturers' implants) or who are current foreign claimants will range from $10,000 to $50,000. A benefit paymentOn June 10, 1998 the Court approved the terms of $3,500 for foreign registrants other than current foreign claimants, so called Other Registrants, has been agreed toa settlement program offered by theBaxter International, Bristol-Myers Squibb Company and the Foreign Claimants Committee. This benefit thus completes thecompany to eligible foreign claimant aspects of the Revisedimplant recipients (the "Foreign Settlement Program. A noticeProgram"). Notices and claim forms were mailed on June 15, 1998. Benefits to eligible foreign registrants has been approved by the Court.claimants range from $3,500 to $50,000. As of the date of this filing, the company believes that approximately 90% of the registrants, including those claimants who filed current claims, have elected to participate in the Revised Settlement Program. It is still unknown as to what disease criteria all claimants have satisfied, and what options they have chosen. As a result, the total amount and timing of the company's prospective payments under the Revised Settlement Program cannot be determined with precision at this time. As of September 30, 1998March 31, 1999, the company has paid $232 million into the court-administered fund as a reserve against costs of claims payable by the company under the Revised Settlement Program (including a $5 million administrative assessment). Additional payments will be made as necessary. Payments to date have been consistent with the company's estimates of the total liability for these claims. 23 In the first quarter of 1994, the company took a pre-tax charge of $35 million ($22 million after tax) in recognition of its then best estimate of its probable liabilities and associated expenses, net of the probable amount of insurance recoverable from its carriers. In the second quarter of 1998, the company increased its estimate of the minimum probable liabilities and associated expenses to approximately $1.1 billion.billion, with an offsetting increase in the probable amount of insurance recoveries. This amount represents the company's best estimate of the minimum amount to cover the cost and expense of 25 the Revised Settlement Program and the cost and expense of resolving opt-outopt- out claims and recovering insurance proceeds. After subtracting payments of $912 million$1.007 billion as of September 30, 1998,March 31, 1999, for defense and other costs and settlements with litigants and claimants, the company had accrued liabilities of $188$93 million. The company has substantial primary and excess products liability occurrence insurance coverage and claims-made products liability insurance coverage, which it believes provide coverage for substantially all of its current exposure for breast implant claims and defense costs. Most insurers have alleged reservations of rights to deny all or part of the coverage for differing reasons, including each insurer's obligations in relation to the other insurers (i.e. allocation) and which claims trigger both the various occurrence and claims-made insurance policies. Some insurers have resolved and paid, or committed to, their policy obligations. The company believes the failure of many insurers to voluntarily perform as promised subjects them to the company's claims for excess liability and damages for breach of the insurers' obligation of good faith. On September 22, 1994, three excess coverage occurrence insurers initiated in the courts of the State of Minnesota a declaratory judgment action against the company and numerous insurance carriers seeking adjudication of certain coverage issues and allocation among insurers. On December 9, 1994, the company initiated an action against its occurrence insurers in the Texas State Court in and for Harrison County, seeking a determination of responsibility among the company's various occurrence insurers with applicable coverages. The state of Texas has the most implant claims. This action has since been removed to the U.S. District Court, Eastern District of Texas, and stayed pending resolution of the litigation in the Minnesota courts. The insurers that are parties to these actions generally acknowledge that they issued products liability insurance to the company and that breast implant claims are products liability claims. The trial in Minnesota to resolve the company's insurance coverage and the financial responsibility of occurrence insurers for breast implant claims and defense costs began on June 4, 1996, and is continuing in phases. The most recent phases with the next trial phase scheduled forwere completed on January 4,20, 1999 and March 31, 1999. 24 In mid-October 1995, the occurrence insurers that are parties to the litigation in Minnesota filed more than 30 motions for summary judgment or partial summary judgment. The insurers, through these motions, attempted to shift all or a portion of the responsibility for those claims the company believes fall within the period of occurrence-based coverage (before 1986) into the period of claims- made coverage (from and after 1986). The trial court denied the insurers' motions, ruling that the key issues of trigger and allocation raised in these motions would be resolved at trial. In the trial's first phase in 1996, the court granted 3M partial declaratory judgment on the question of when insurance coverage is 26 "triggered." The court also granted the insurers' motion for partial declaratory judgment on the question of the allocation method to be applied in the case. In July 1997, the trial court ruled further on the trigger issue and on the general allocation method. That ruling was consistent with and further supported the company's opinion as stated in the following paragraph. In November 1997, upon reconsideration, the court reversed a portion of its July ruling and reinstated a portion of its previous ruling. The company believesbelieved that conflicting rulings now existexisted that needneeded to be clarified by the court and reconciled with applicable law. Motions to clarify the allocation methodology of triggered policies under these rulings are pending.were filed and have been ruled upon by the Court. While the Court options include clarification, further trial followed by additionalclarified certain aspects of these rulings or certification for interlocutory (whileit also ruled that there would be no allocation from and after 1986. This ruling is consistent with the case is still pending) appeal.company's position on the allocation issue. The company believes it ultimately will prevail in this insurance litigation. The company's belief is based on an analysis of its insurance policies; court decisions on these and similar issues; reimbursement by insurers for these types of claims; and consultation with outside counsel who are experts in insurance coverage matters. If, however, the occurrence insurers ultimately prevail in this insurance litigation, the company could be effectively deprived of significant and potentially material insurance coverage for breast implant claims. (See discussion of the accrued receivables for insurance recoveries below.) As of September 30, 1998,March 31, 1999, the company had accrued receivables for insurance recoveries of $772$750 million, substantially all of which is contested by the insurance carriers. During the first quarter of 1999 the company executed a settlement agreement with its lead occurrence underwriter. The first payment of settlement dollars was received on April 14, 1999, with additional and final payments to be made no later than June 15, 1999. Various factors could affect the timing and amount of proceeds to be received under the company's various insurance policies, including (i) the timing of payments made in settlement of claims; (ii) the outcome of occurrence insurance litigation in the courts of Minnesota (as discussed above) and Texas; (iii) potential arbitration with claims-made insurers; (iv) delays in payment by insurers; and (v) the extent to which insurers may become insolvent in the future. There can be no absolute assurance that the company will collect all amounts accrued as being probable of recovery from its insurers. 25 The company's current estimate of the probable liabilities, associated expenses and probable insurance recoveries related to the breast implant claims is based on the facts and circumstances existing at this time. New developments may occur that could affect the company's estimates of probable liabilities (including associated expenses) and the probable amount of insurance recoveries. These developments include, but are not limited to, (i) the ultimate Fixed Amount Benefit distribution to claimants in the Revised Settlement Program; (ii) the success of and costs to the company in defending opt-out claims, including claims involving breast implants not manufactured or sold by the company; (iii) the outcome of the occurrence insurance litigation in the courts of Minnesota and Texas; and (iv) the outcome of potential arbitration with claims-made insurers. 27 The company cannot determine the impact of these potential developments on the current estimate of probable liabilities (including associated expenses) and the probable amount of insurance recoveries. Accordingly, the company is not able to estimate its possible future liabilities and recoveries beyond the current estimates of probable amounts. As new developments occur, these estimates may be revised, or additional charges may be necessary to reflect the impact of these developments on the costs to the company of resolving breast implant litigation, claims and insurance recoveries. Such revisions or additional future charges could have a material adverse impact on the company's net income in the quarterly period in which they are recorded. Although the company considers it unlikely, such revisions or additional future charges could also have a material adverse effect on the consolidated financial position or annual results of operations of the company. The company conducts ongoing reviews, assisted by outside counsel, to determine the adequacy and extent of insurance coverage provided by its occurrence and claims-made insurers. The company believes, based on these ongoing reviews and the bases described in the fourth preceding paragraph, it is probable that the collectible coverage provided by its applicable insurance policies is sufficient to cover substantially all of its current exposure for breast implant claims and defense costs. Based on the availability of this insurance coverage, the company believes that its uninsured financial exposure has not materially changed since the first quarter of 1994. Therefore, no recognition of additional charges has been made. Environmental Matters The company also is involved in a number of environmental proceedings by governmental agencies and by private parties asserting liability for past waste disposal and other alleged environmental damage. The company conducts ongoing investigations, assisted by environmental consultants, to determine accruals for the probable, estimable costs of remediation. The remediation accruals are reviewed each quarter and changes are made as appropriate. 2826 Item 6. Exhibits and Reports on Form 8-K (a) The following documents are filed as exhibits to this Report. (12) A statement regarding the calculation of the ratio of earnings to fixed charges. Page 30.28. (15) A letter from the company's independent auditors regarding unaudited interim consolidated financial statements. Page 31.29. (27) Financial data schedule (EDGAR filing only). (b) Reports on Form 8-K: The company filed a report on Form 8-K dated August 27, 1998. In a release dated August 27, 1998, the company announced that it expects double-digit earnings growth for the coming three years and sales to increase an average of eight percent per year. The company also announced its plans for growth and productivity improvement. The company stated that it anticipates a pre-tax charge of as much as $500 million associated with actions outlined in the release. The news release contained forward-looking statements relating to earnings and sales growth over the next three years and other matters. The news release was attached as Exhibit 99 to the Form 8-K. None of the other item requirements of Part II of Form 10-Q are applicable to the company for the quarter ended September 30, 1998.March 31, 1999. 2927 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MINNESOTA MINING AND MANUFACTURING COMPANY (Registrant) Date: NovemberMay 6, 19981999 /s/ Giulio Agostini Giulio Agostini, Senior Vice President and Chief Financial Officer (Mr. Agostini is the Principal Financial and Accounting Officer and has been duly authorized to sign on behalf of the registrant.)