FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
3M COMPANY
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Delaware |
41-0417775 |
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State of Incorporation |
I.R.S. Employer Identification No. |
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3M Center, St. Paul, Minnesota 55144 |
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Principal executive offices |
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Telephone number: (651) 733-1110 |
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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 ý. No o.
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes ý. No o.
Shares of common stock outstanding at June 30, 2005: 765,071,989.
This document (excluding exhibits) contains 35 pages.
The table of contents is set forth on page 2.
The exhibit index begins on page 33.
3M COMPANY
TABLE OF CONTENTS
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PART I |
FINANCIAL INFORMATION |
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Index to Financial Statements: |
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Note 4. Supplemental Stockholders’ Equity and Comprehensive Income Information |
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Note 11. Review Report of Independent Registered Public Accounting Firm |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Index to Management’s Discussion and Analysis: |
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2
Consolidated Statement of Income
(Unaudited)
3M Company and Subsidiaries
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(Millions, except per share amounts) |
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Three months ended |
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Six months ended |
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June 30 |
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June 30 |
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2005 |
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2004 |
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2005 |
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2004 |
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Net sales |
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$ |
5,294 |
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$ |
5,012 |
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$ |
10,460 |
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$ |
9,951 |
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Operating expenses |
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Cost of sales |
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2,594 |
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2,452 |
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5,131 |
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4,888 |
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Selling, general and administrative expenses |
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1,121 |
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1,084 |
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2,235 |
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2,188 |
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Research, development and related expenses |
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296 |
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290 |
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587 |
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572 |
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Total |
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4,011 |
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3,826 |
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7,953 |
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7,648 |
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Operating income |
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1,283 |
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1,186 |
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2,507 |
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2,303 |
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Interest expense and income |
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Interest expense |
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19 |
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16 |
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39 |
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35 |
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Interest income |
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(16 |
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(10 |
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(32 |
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(20 |
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Total |
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3 |
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6 |
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7 |
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15 |
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Income before income taxes and minority interest |
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1,280 |
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1,180 |
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2,500 |
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2,288 |
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Provision for income taxes |
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492 |
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389 |
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888 |
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755 |
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Minority interest |
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12 |
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18 |
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27 |
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38 |
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Net income |
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$ |
776 |
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$ |
773 |
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$ |
1,585 |
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$ |
1,495 |
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Weighted average common shares outstanding – basic |
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768.0 |
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782.5 |
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769.8 |
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782.7 |
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Earnings per share – basic |
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$ |
1.01 |
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$ |
.99 |
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$ |
2.06 |
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$ |
1.91 |
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Weighted average common shares outstanding – diluted |
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780.2 |
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799.7 |
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783.6 |
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799.6 |
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Earnings per share – diluted |
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$ |
1.00 |
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$ |
.97 |
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$ |
2.02 |
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$ |
1.87 |
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Cash dividends paid per common share |
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$ |
.42 |
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$ |
.36 |
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$ |
.84 |
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$ |
.72 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
3
(Unaudited)
3M Company and Subsidiaries
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(Dollars in millions, except per share amounts) |
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Jun. 30 |
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Dec. 31 |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
1,765 |
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$ |
2,757 |
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Accounts receivable – net |
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2,951 |
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2,792 |
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Inventories |
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Finished goods |
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967 |
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947 |
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Work in process |
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671 |
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614 |
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Raw materials and supplies |
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382 |
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336 |
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Total inventories |
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2,020 |
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1,897 |
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Other current assets |
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1,212 |
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1,274 |
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Total current assets |
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7,948 |
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8,720 |
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Investments |
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274 |
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227 |
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Property, plant and equipment |
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15,923 |
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16,290 |
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Less: Accumulated depreciation |
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(10,407 |
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(10,579 |
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Property, plant and equipment – net |
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5,516 |
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5,711 |
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Goodwill |
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2,511 |
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2,655 |
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Intangible assets – net |
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241 |
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277 |
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Prepaid pension and postretirement benefits |
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2,510 |
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2,591 |
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Other assets |
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557 |
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527 |
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Total assets |
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$ |
19,557 |
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$ |
20,708 |
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Liabilities and Stockholders’ Equity |
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Current liabilities |
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Short-term borrowings and current portion of long-term debt |
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$ |
1,103 |
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$ |
2,094 |
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Accounts payable |
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1,201 |
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1,168 |
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Accrued payroll |
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475 |
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487 |
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Accrued income taxes |
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1,187 |
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867 |
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Other current liabilities |
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1,340 |
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1,455 |
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Total current liabilities |
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5,306 |
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6,071 |
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Long-term debt |
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706 |
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727 |
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Other liabilities |
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3,445 |
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3,532 |
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Total liabilities |
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$ |
9,457 |
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$ |
10,330 |
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Commitments and contingencies (Note 8) |
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Stockholders’ equity |
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Common stock, $.01 par value, 944,033,056 shares issued |
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9 |
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9 |
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Capital in excess of par value |
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287 |
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287 |
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Retained earnings |
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16,446 |
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15,649 |
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Treasury stock, at cost; 178,961,067 shares at Jun. 30, 2005; 170,514,775 shares at Dec. 31, 2004 |
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(6,175 |
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(5,503 |
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Unearned compensation |
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(176 |
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(196 |
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Accumulated other comprehensive income (loss) |
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(291 |
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132 |
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Stockholders’ equity – net |
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10,100 |
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10,378 |
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Total liabilities and stockholders’ equity |
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$ |
19,557 |
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$ |
20,708 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
4
Consolidated Statement of Cash Flows
(Unaudited)
3M Company and Subsidiaries
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(Dollars in millions) |
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Six months ended |
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2005 |
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2004 |
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Cash Flows from Operating Activities |
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Net income |
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$ |
1,585 |
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$ |
1,495 |
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Adjustments to reconcile net income to net cash provided by operating activities |
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Depreciation and amortization |
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479 |
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497 |
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Company pension contributions |
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(76 |
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(70 |
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Deferred income tax provision |
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(46 |
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7 |
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Changes in assets and liabilities |
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Accounts receivable |
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(291 |
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(223 |
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Inventories |
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(193 |
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(129 |
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Other current assets |
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55 |
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(125 |
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Other assets – net of amortization |
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36 |
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107 |
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Accrued income taxes |
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420 |
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310 |
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Accounts payable |
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83 |
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18 |
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Other current liabilities |
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(17 |
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194 |
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Other liabilities |
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108 |
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160 |
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Other – net |
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28 |
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(4 |
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Net cash provided by operating activities |
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2,171 |
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2,237 |
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Cash Flows from Investing Activities |
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Purchases of property, plant and equipment (PP&E) |
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(452 |
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(378 |
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Proceeds from sale of PP&E and other assets |
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28 |
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20 |
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Acquisitions, net of cash acquired |
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— |
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(86 |
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Purchases of investments |
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(955 |
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— |
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Proceeds from sale of investments |
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896 |
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9 |
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Net cash used in investing activities |
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(483 |
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(435 |
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Cash Flows from Financing Activities |
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Change in short-term debt – net |
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(580 |
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(65 |
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Repayment of debt (maturities greater than 90 days) |
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(480 |
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(351 |
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Proceeds from debt (maturities greater than 90 days) |
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69 |
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130 |
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Purchases of treasury stock |
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(1,185 |
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(792 |
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Reissuances of treasury stock |
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287 |
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352 |
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Dividends paid to stockholders |
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(647 |
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(564 |
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Distributions to minority interests |
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(45 |
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— |
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Other – net |
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9 |
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(23 |
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Net cash used in financing activities |
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(2,572 |
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(1,313 |
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Effect of exchange rate changes on cash and cash equivalents |
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(108 |
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(11 |
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Net increase (decrease) in cash and cash equivalents |
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(992 |
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478 |
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Cash and cash equivalents at beginning of year |
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2,757 |
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1,836 |
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Cash and cash equivalents at end of period |
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$ |
1,765 |
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$ |
2,314 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
5
Notes to Consolidated Financial Statements
The interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. These adjustments consist of normal, recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year. The interim consolidated financial statements and notes are presented as permitted by the requirements for Quarterly Reports on Form 10-Q. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its 2004 Annual Report on Form 10-K and the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2005.
Significant Accounting Policies
Earnings per share: The difference in the weighted average shares outstanding for calculating basic and diluted earnings per share is attributable to the dilution associated with the Company’s stock-based compensation plans. Certain Management Stock Ownership Program (MSOP) options outstanding were not included in the computation of diluted earnings per share because they would not have had a dilutive effect (13.2 million average options for the three months ended June 30, 2005; 6.7 million average options for the six months ended June 30, 2005; an immaterial amount of options were not included for the three months and six months ended June 30, 2004). The conditions for conversion related to the Company’s $639 million in aggregate face amount of Convertible Notes were not met (refer to 3M’s 2004 Annual Report on Form 10-K, Note 9 to the Consolidated Financial Statements, for more detail); accordingly, there was no impact on 3M’s diluted earnings per share. If the conditions for conversion are met, 3M may choose to pay in cash and/or common stock; however, if this occurs, the Company has the intent and ability to settle this debt security in cash. Refer to the “New Accounting Pronouncements” section that follows for discussion of EITF 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share”. The computations for basic and diluted earnings per share follow:
Earnings Per Share Computations
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(Amounts in millions, except per share amounts) |
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Three months ended |
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Six months ended |
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June 30 |
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June 30 |
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2005 |
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2004 |
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2005 |
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2004 |
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Numerator: |
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Net income |
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$ |
776 |
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$ |
773 |
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$ |
1,585 |
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$ |
1,495 |
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Denominator: |
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Denominator for weighted average common shares outstanding – basic |
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768.0 |
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782.5 |
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769.8 |
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782.7 |
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Dilution associated with the Company’s stock-based compensation plans |
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12.2 |
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17.2 |
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13.8 |
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16.9 |
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Denominator for weighted average common shares outstanding – diluted |
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780.2 |
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799.7 |
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783.6 |
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799.6 |
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Earnings per share – basic |
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$ |
1.01 |
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$ |
.99 |
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$ |
2.06 |
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$ |
1.91 |
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Earnings per share – diluted |
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1.00 |
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.97 |
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2.02 |
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1.87 |
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6
Stock-based compensation: The intrinsic value method is used as prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, and generally no compensation cost is recognized for either the General Employees’ Stock Purchase Plan (GESPP) or the MSOP. The GESPP is considered non-compensatory. In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS No. 123.” The Company has adopted the disclosure requirements of SFAS No. 148. Refer to the “New Accounting Pronouncements” section that follows for discussion of SFAS No. 123R, “Share Based Payment”. Pro forma amounts based on the options’ estimated Black-Scholes fair value, net of tax, at the grant dates for awards are recognized over the vesting period of the stock-based compensation award. Effective with the May 2005 annual grant, the Company changed its vesting period from one to three years, which results in compensation expense under this May 2005 grant being recognized over three years. The decrease in pro forma stock-based compensation expense to $22 million in the second quarter of 2005, compared with $30 million in the same period last year, was partially driven by this change in vesting period. Pro forma amounts for stock-based compensation are as follows:
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Stock-Based Compensation |
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Three months ended |
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Six months ended |
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Pro Forma Net Income and Earnings Per Share |
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June 30 |
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June 30 |
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(Millions, except per share amounts) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
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Net income, as reported |
|
$ |
776 |
|
$ |
773 |
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$ |
1,585 |
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$ |
1,495 |
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Add: Stock-based compensation expense included in net income, net of related tax effects |
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— |
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— |
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4 |
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1 |
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Deduct: Total stock-based compensation expense determined under fair value, net of related tax effects |
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(22 |
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(30 |
) |
(64 |
) |
(58 |
) |
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Pro forma net income |
|
754 |
|
743 |
|
1,525 |
|
1,438 |
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Earnings per share – basic |
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As reported |
|
$ |
1.01 |
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$ |
.99 |
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$ |
2.06 |
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$ |
1.91 |
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Pro forma |
|
.98 |
|
.95 |
|
1.98 |
|
1.84 |
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Earnings per share – diluted |
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As reported |
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$ |
1.00 |
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$ |
.97 |
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$ |
2.02 |
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$ |
1.87 |
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Pro forma |
|
.96 |
|
.93 |
|
1.94 |
|
1.80 |
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The Company has historically recognized compensation cost over the nominal vesting period, whereby if an employee retired before the end of the vesting period, the Company would recognize any remaining unrecognized compensation cost at the date of retirement. SFAS No. 123R requires recognition under a non-substantive vesting period approach, requiring compensation expense recognition when an employee is eligible to retire. 3M employees in the U.S. are eligible to retire after age 55 and having completed five years of service. The Company will change to the non-substantive vesting period approach for new stock compensation grants made after the Company adopts SFAS No. 123R. The following table adjusts pro forma diluted earnings per share from the above table to reflect the approximate impact of using the non-substantive vesting approach for retirement-eligible employees.
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Stock-Based Compensation |
|
Three months ended |
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Six months ended |
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2005 |
|
2004 |
|
2005 |
|
2004 |
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Pro forma (from above table) |
|
$ |
.96 |
|
$ |
.93 |
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$ |
1.94 |
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$ |
1.80 |
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Impact of retirement-eligible |
|
(.04 |
) |
(.04 |
) |
(.03 |
) |
(.04 |
) |
||||
|
Pro forma (adjusted to reflect non-substantive vesting period approach) |
|
$ |
.92 |
|
$ |
.89 |
|
$ |
1.91 |
|
$ |
1.76 |
|
New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004). SFAS No. 123R supersedes APB Opinion No. 25. Under APB Opinion No. 25, no compensation expense is recognized for stock option grants if the exercise price of the Company’s stock option grants is at or above the fair market value of the underlying stock on the date of grant. SFAS No. 123R requires the determination of the fair value of the share-based compensation at the grant date and the recognition of the related expense over the period in which the share-based compensation vests. The original effective date for SFAS No. 123R for the Company was July 1, 2005. However, on April 14, 2005, the Securities and Exchange Commission (SEC) adopted a new rule that amends the effective dates for SFAS No. 123R. The SEC’s new rule allows companies to implement SFAS No. 123R at the beginning of their next fiscal
7
year, instead of the next reporting period, that begins after June 15, 2005. Therefore, the Company plans to adopt SFAS No. 123R effective January 1, 2006.
In March 2005, the FASB issued FASB Interpretation No. (FIN) 47, “Accounting for Conditional Asset Retirement Obligations”. FIN 47 clarifies the term “conditional asset retirement obligation” used in SFAS No. 143. FIN 47 is effective for the Company no later than December 31, 2005. The Company is in the process of evaluating whether FIN 47 will result in the recognition of additional asset retirement obligations for the Company.
In September 2004, the FASB’s Emerging Issues Task Force finalized EITF Issue No. 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” that would require the dilutive effect of shares from contingently convertible debt to be included in the diluted earnings per share calculation regardless of whether the contingency has been met. The Company has $639 million in aggregate face amount of 30-year zero coupon senior notes that are convertible into approximately six million shares of common stock if certain conditions are met. These conditions have never been met. The FASB is also in the process of amending SFAS No. 128, anticipated to be issued in 2005, which is expected to further address this and several other issues. Unless the Company takes steps to modify certain terms of this debt security, EITF Issue No. 04-08 and proposed SFAS No. 128R (when effective), would result in an increase of approximately six million shares to diluted shares outstanding to give effect to the contingent issuance of shares. Also, using the if-converted method, net income for the diluted earnings per share calculations would be adjusted for interest expense associated with this debt instrument. EITF Issue No. 04-08 would have been effective beginning with the Company’s 2004 fourth quarter. However, due to the FASB’s delay in issuing SFAS No. 128R and the Company’s intent and ability to settle this debt security in cash versus the issuance of stock, the impact of the additional diluted shares will not be included in the diluted earnings per share calculation until SFAS No. 128R is effective. When SFAS No. 128R is effective, prior periods’ diluted shares outstanding and diluted earnings per share amounts will be restated to present comparable information. The estimated annual reduction in 3M’s diluted earnings per share would have been approximately $.02 per share for total year 2004. Because the impact of this standard is ongoing, 3M’s diluted shares outstanding and diluted earnings per share amounts would be impacted until retirement or modification of certain terms of this debt security.
In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”, which provides guidance under SFAS No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Act) on enterprises’ income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. The Jobs Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. FSP No. 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. During the quarter ended June 30, 2005, the Company completed its evaluation of the repatriation provision and will reinvest approximately $1.7 billion of foreign earnings in the United States pursuant to the provisions of the Jobs Act. Therefore, in the quarter ended June 30, 2005, the Company recognized $75 million, net of available foreign tax credits, of related tax liability as a result of the repatriation plan. The Company will continue to evaluate additional repatriation opportunities through the end of 2005.
NOTE 2. Acquisitions and Divestitures
The acquisition of CUNO, Incorporated was completed on August 2, 2005. CUNO, Incorporated is a leader in the design, manufacture and marketing of a comprehensive line of filtration products for the separation, clarification and purification of fluids and gases. 3M and CUNO, Incorporated have complementary sets of filtration technologies and the opportunity to bring an even wider range of filtration solutions to customers around the world. 3M acquired CUNO, Incorporated for a total purchase price of approximately $1.35 billion, including the assumption of $60 million of existing net debt. This acquisition had no impact on either first six-month 2005 operating results or the balance sheet as of June 30, 2005. Pro-forma information related to this acquisition is not included because the impact on the Company’s consolidated results of operations is not considered to be material.
8
As discussed in Note 9, 3M realigned its business segments and began reporting under this new structure effective January 1, 2005. To reflect this new structure, the December 31, 2004, goodwill balances presented below reflect a $67 million reclassification from the Industrial segment to the Electro and Communications segment. The business segment realignment also resulted in certain changes in reporting units for 3M. 3M has 18 reporting units under the criteria set forth by SFAS No. 142. SFAS No. 142 requires that goodwill be tested for impairment at least annually and when reporting units are changed. During the first quarter of 2005, the Company completed its assessment of any potential goodwill impairments under this new structure and determined that no impairments existed.
The goodwill balance by business segment as of June 30, 2005, and December 31, 2004, follow:
|
Goodwill |
|
Dec. 31, |
|
2005 |
|
2005 |
|
Jun. 30, |
|
||||
|
Health Care |
|
$ |
575 |
|
$ |
— |
|
$ |
(46 |
) |
$ |
529 |
|
|
Industrial |
|
345 |
|
— |
|
(44 |
) |
301 |
|
||||
|
Display and Graphics |
|
885 |
|
— |
|
(2 |
) |
883 |
|
||||
|
Consumer and Office |
|
59 |
|
— |
|
(2 |
) |
57 |
|
||||
|
Safety, Security and Protection Services |
|
193 |
|
— |
|
(15 |
) |
178 |
|
||||
|
Electro and Communications |
|
566 |
|
— |
|
(34 |
) |
532 |
|
||||
|
Transportation |
|
32 |
|
— |
|
(1 |
) |
31 |
|
||||
|
Total Company |
|
$ |
2,655 |
|
$ |
— |
|
$ |
(144 |
) |
$ |
2,511 |
|
The carrying amount and accumulated amortization of acquired intangible assets as of June 30, 2005, and December 31, 2004, follow:
|
(Millions) |
|
Jun. 30 |
|
Dec. 31 |
|
||
|
Patents |
|
$ |
315 |
|
$ |
330 |
|
|
Other amortizable intangible assets |
|
160 |
|
162 |
|
||
|
Non-amortizable intangible assets (tradenames) |
|
62 |
|
69 |
|
||
|
Total gross carrying amount |
|
537 |
|
561 |
|
||
|
|
|
|
|
|
|
||
|
Accumulated amortization – patents |
|
(193 |
) |
(187 |
) |
||
|
Accumulated amortization – other |
|
(103 |
) |
(97 |
) |
||
|
Total accumulated amortization |
|
(296 |
) |
(284 |
) |
||
|
Total intangible assets – net |
|
$ |
241 |
|
$ |
277 |
|
Amortization expense for acquired intangible assets for the three-month and six-month periods ended June 30, 2005 and 2004 follows:
|
|
|
Three months ended |
|
Six months ended |
|
||||||||
|
|
|
June 30 |
|
June 30 |
|
||||||||
|
(Millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
Amortization expense |
|
$ |
10 |
|
$ |
11 |
|
$ |
22 |
|
$ |
22 |
|
The table below shows expected amortization expense for acquired intangible assets recorded as of June 30, 2005:
|
|
|
Last 2 |
|
|
|
|
|
|
|
|
|
After |
|
||||||
|
(Millions) |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2009 |
|
||||||
|
Amortization expense |
|
$ |
21 |
|
$ |
40 |
|
$ |
32 |
|
$ |
25 |
|
$ |
21 |
|
$ |
40 |
|
The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment of intangible assets, accelerated amortization of intangible assets and other events.
9
NOTE 4. Supplemental Stockholders’ Equity and Comprehensive Income Information
Accumulated Other Comprehensive Income (Loss)
|
(Millions) |
|
June 30, |
|
Dec. 31, |
|
||
|
Cumulative translation – net |
|
$ |
(209 |
) |
$ |
282 |
|
|
Minimum pension liability adjustments – net |
|
(110 |
) |
(110 |
) |
||
|
Debt and equity securities, unrealized gain – net |
|
1 |
|
2 |
|
||
|
Cash flow hedging instruments, unrealized gain (loss) – net |
|
27 |
|
(42 |
) |
||
|
Total accumulated other comprehensive income (loss) |
|
$ |
(291 |
) |
$ |
132 |
|
Income tax effects for cumulative translation are not significant because no tax provision has been made for the translation of foreign currency financial statements into U.S. dollars. Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part of net income. Reclassification adjustments (other than for cash flow hedging instruments discussed in Note 6 to the Consolidated Financial Statements) were not material.
|
TOTAL COMPREHENSIVE INCOME |
|
Three months ended |
|
||||
|
|
|
|
|||||
|
(Millions) |
|
2005 |
|
2004 |
|
||
|
Net Income |
|
$ |
776 |
|
$ |
773 |
|
|
Other comprehensive income (loss) |
|
|
|
|
|
||
|
Cumulative translation – net of $12 million tax provision in 2005 and $3 million tax provision in 2004 |
|
(279 |
) |
(72 |
) |
||
|
Debt and equity securities, unrealized gain (loss) – net of immaterial tax impact in 2005 and 2004 |
|
(1 |
) |
(1 |
) |
||
|
Cash flow hedging instruments, unrealized gain (loss) – net of $16 million tax provision in 2005 and net of $11 million tax provision in 2004 |
|
24 |
|
19 |
|
||
|
Total comprehensive income |
|
$ |
520 |
|
$ |
719 |
|
|
TOTAL COMPREHENSIVE INCOME |
|
Six months ended |
|
||||
|
|
|
|
|||||
|
(Millions) |
|
2005 |
|
2004 |
|
||
|
Net Income |
|
$ |
1,585 |
|
$ |
1,495 |
|
|
Other comprehensive income (loss) |
|
|
|
|
|
||
|
Cumulative translation – net of $20 million tax provision in 2005 and net of $2 million tax provision in 2004 |
|
(491 |
) |
(107 |
) |
||
|
Debt and equity securities, unrealized gain (loss) – net of immaterial tax impact in 2005 and 2004 |
|
(1 |
) |
(1 |
) |
||
|
Cash flow hedging instruments, unrealized gain (loss) – net of $42 million tax provision in 2005 and net of $22 million tax provision in 2004 |
|
69 |
|
38 |
|
||
|
Total comprehensive income |
|
$ |
1,162 |
|
$ |
1,425 |
|
NOTE 5. Long-Term Debt and Short-Term Borrowings
Credit support for outstanding commercial paper is provided by a $565 million credit agreement among a group of primary relationship banks. In March 2005, the Company replaced its 364-day credit agreement with a five-year credit agreement with similar terms. This $565 million credit facility provides up to $115 million in letters of credit ($97 million of which was utilized at June 30, 2005), with provisions for increasing this limit up to $150 million.
10
NOTE 6. Derivatives and Other Financial Instruments
The Company uses interest rate swaps, currency swaps, and forward and option contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity market volatility.
Net Investment Hedging and Cash Flow Hedging: The table that follows recaps net investment hedging and cash flow hedging amounts. Reclassification adjustments are made to avoid double counting in comprehensive income items that are also included as part of net income. The amount of the reclassification adjustment recognized in other comprehensive income is equal to, but opposite in sign from, the amount of the realized gain or loss in net income.
|
DERIVATIVES |
|
Three months ended |
|
Six months ended |
|
||||||||
|
Net of Tax |
|
June 30 |
|
June 30 |
|
||||||||
|
(Millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Unrealized gain/(loss) recorded in cumulative translation |
|
|
|
|
|
|
|
|
|
||||
|
Net investment hedging |
|
$ |
14 |
|
$ |
(6 |
) |
$ |
12 |
|
$ |
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash flow hedging instruments balance and activity |
|
|
|
|
|
|
|
|
|
||||
|
Beginning balance |
|
$ |
3 |
|
$ |
(26 |
) |
$ |
(42 |
) |
$ |
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net unrealized holding gain/(loss) |
|
19 |
|
6 |
|
54 |
|
5 |
|
||||
|
Reclassification adjustment |
|
5 |
|
13 |
|
15 |
|
33 |
|
||||
|
Total activity |
|
24 |
|
19 |
|
69 |
|
38 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Ending balance |
|
$ |
27 |
* |
$ |
(7 |
) |
$ |
27 |
* |
$ |
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Tax expense or benefit (cash flow hedging instruments) |
|
|
|
|
|
|
|
|
|
||||
|
Net unrealized holding gain/(loss) |
|
$ |
(13 |
) |
$ |
(4 |
) |
$ |
(33 |
) |
$ |
(4 |
) |
|
Reclassification adjustment |
|
(3 |
) |
(7 |
) |
(9 |
) |
(18 |
) |
||||
*Based on exchange rates at June 30, 2005, the Company expects to reclassify to earnings over the next 12 months a majority of the cash flow hedging instruments after-tax gain of $27 million (with the impact largely offset by foreign currency cash flows from underlying hedged items).
11
Components of net periodic benefit cost and other supplemental information for the three months and six months ended June 30 follow:
|
Benefit Plan Information |
|
Three months ended June 30 |
|
||||||||||||||||
|
|
|
Qualified and Non-qualified |
|
Postretirement |
|
||||||||||||||
|
|
|
Pension Benefits |
|
Benefits |
|
||||||||||||||
|
|
|
United States |
|
International |
|
|
|
|
|
||||||||||
|
(Millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Service cost |
|
$ |
44 |
|
$ |
41 |
|
$ |
27 |
|
$ |
26 |
|
$ |
13 |
|
$ |
13 |
|
|
Interest cost |
|
125 |
|
121 |
|
45 |
|
40 |
|
25 |
|
25 |
|
||||||
|
Expected return on plan assets |
|
(165 |
) |
(157 |
) |
(56 |
) |
(49 |
) |
(24 |
) |
(21 |
) |
||||||
|
Amortization of transition (asset) obligation |
|
— |
|
— |
|
1 |
|
1 |
|
— |
|
— |
|
||||||
|
Amortization of prior service cost (benefit) |
|
4 |
|
4 |
|
(1 |
) |
— |
|
(10 |
) |
(10 |
) |
||||||
|
Recognized net actuarial (gain) loss |
|
45 |
|
40 |
|
15 |
|
11 |
|
22 |
|
23 |
|
||||||
|
Net periodic benefit cost |
|
$ |
53 |
|
$ |
49 |
|
$ |
31 |
|
$ |
29 |
|
$ |
26 |
|
$ |
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Settlements, curtailments and special termination benefits |
|
1 |
|
3 |
|
— |
|
— |
|
— |
|
— |
|
||||||
|
Net periodic benefit cost after settlements, curtailments and special termination benefits |
|
$ |
54 |
|
$ |
52 |
|
$ |
31 |
|
$ |
29 |
|
$ |
26 |
|
$ |
30 |
|
|
Benefit Plan Information |
|
Six months ended June 30 |
|
||||||||||||||||
|
|
|
Qualified and Non-qualified |
|
Postretirement |
|
||||||||||||||
|
|
|
Pension Benefits |
|
Benefits |
|
||||||||||||||
|
|
|
United States |
|
International |
|
|
|
|
|
||||||||||
|
(Millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Service cost |
|
$ |
88 |
|
$ |
82 |
|
$ |
54 |
|
$ |
52 |
|
$ |
27 |
|
$ |
27 |
|
|
Interest cost |
|
250 |
|
242 |
|
91 |
|
80 |
|
50 |
|
50 |
|
||||||
|
Expected return on plan assets |
|
(330 |
) |
(314 |
) |
(112 |
) |
(98 |
) |
(47 |
) |
(42 |
) |
||||||
|
Amortization of transition (asset) obligation |
|
— |
|
— |
|
2 |
|
2 |
|
— |
|
— |
|
||||||
|
Amortization of prior service cost (benefit) |
|
7 |
|
7 |
|
(2 |
) |
— |
|
(20 |
) |
(20 |
) |
||||||
|
Recognized net actuarial (gain) loss |
|
90 |
|
80 |
|
30 |
|
22 |
|
43 |
|
45 |
|
||||||
|
Net periodic benefit cost |
|
$ |
105 |
|
$ |
97 |
|
$ |
63 |
|
$ |
58 |
|
$ |
53 |
|
$ |
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Settlements, curtailments and special termination benefits |
|
6 |
|
12 |
|
— |
|
— |
|
— |
|
— |
|
||||||
|
Net periodic benefit cost after settlements, curtailments and special termination benefits |
|
$ |
111 |
|
$ |
109 |
|
$ |
63 |
|
$ |
58 |
|
$ |
53 |
|
$ |
60 |
|
The Company expects to contribute in 2005 an amount in the range of $100 million to $400 million to its U.S. and international pension plans and approximately $150 million to its post-retirement plans. However, the amount of the anticipated discretionary pension contribution could vary significantly depending on the U.S. plans’ funding status as of the 2005 measurement date and the anticipated tax deductibility of the contribution. The Company does not have a required minimum pension contribution obligation for its U.S. plans in 2005. For the six months ended June 30, 2005, contributions totaling $76 million were made to the Company’s U.S. and international pension plans.
12
NOTE 8. Commitments and Contingencies
A description of the significant legal proceedings in which the company is involved, both in general and with respect to specific matters, is contained in the company’s Annual Report on Form 10-K for the period ended December 31, 2004, and the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2005 (collectively the “Reports”). This section describes significant developments since the preparation of the Reports and should be read with reference to them. Unless specifically indicated, all previously reported matters remain pending.
Antitrust Litigation
During the second quarter of 2005, the plaintiffs in two indirect purchaser actions filed amended complaints alleging that the pricing and promotional programs at issue in the LePage’s matter and the various tape-related class actions also injured indirect purchasers of other 3M consumer products that were included in such programs. The previously-disclosed settlement agreement of twelve tape-related class actions brought on behalf of indirect purchasers, if approved by the court, is expected to resolve the claims concerning tape purchases in these two additional cases but will not affect their claims concerning other products. The Company has moved to dismiss both complaints.
In the direct purchaser class action pending in the United States District Court for the Eastern District of Pennsylvania, the court granted partial relief on the Company’s motion for reconsideration of the court’s determination that some of the factual findings of the LePage’s jury will be deemed established by virtue of the final judgment in the LePage’s case (the “collateral estoppel order”). Thereafter the Court granted the Company’s motion for permission to seek from the United States Court of Appeals for the Third Circuit the ability to take an immediate appeal from the revised collateral estoppel order. The same court denied the Company’s motion to dismiss the purported class action on behalf of customers (private label tape purchasers) excluded from the previously reported class certification order issued by that court in August 2004. In July 2005, an alleged direct tape purchaser filed an additional individual lawsuit in the same court against the Company.
Breast Implant Insurance Recovery
As previously reported, the Company is engaged in legal proceedings to effectuate the previously disclosed Minnesota Supreme Court ruling in 2003 that was favorable to the Company’s claim for coverage against its insurers. The Company recently reached agreements concerning the amounts due with four additional insurers pursuant to which the Company received about $35 million in July 2005 and expects to receive additional payments of approximately $16 million as a result of these settlements. With these recent settlements, 10 of the 29 insurers have withdrawn from the pending proceedings and have settled the Company’s claims under the Minnesota Supreme Court decision. The Company also received approximately $17 million in July 2005 from the estates of two insolvent insurers. In addition, in the second quarter of 2005, the Company’s captive insurer collected reinsurance of $1.5 million under reinsurance policies for the same liability. The amounts paid under these settlements are consistent with the Company’s overall expectation of recovery.
Respirator Mask/Asbestos Litigation
For more than 25 years, the Company has defended and resolved the claims of over 350,000 individual claimants alleging injuries from occupational dust exposures. As of June 30, 2005, the company is a named defendant, typically with multiple co-defendants, in numerous lawsuits in various courts that purport to assert claims by approximately 56,300 individual claimants. As a result of the costs of aggressively defending itself, the Company increased its reserves during the second quarter of 2005 by $30 million to $242 million and increased its receivables for insurance recoveries by $15 million to $452 million related to this litigation. Such accruals are subject to the various factors previously disclosed.
The vast majority of the lawsuits and claims resolved by and currently pending against the Company 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 workplace exposures to asbestos, silica, coal or other occupational dusts, found in products manufactured by other defendants or generally in the workplace. The remaining claimants generally allege personal injury from occupational exposure to asbestos from products previously manufactured by the Company, which are often unspecified, and by other defendants, or occasionally at Company premises.
On June 30, 2005, the United States District Court for the Southern District of Texas issued a ruling imposing sanctions on a law firm representing numerous plaintiffs in the consolidated proceedings involving approximately
13
7,600 silica-related claims that had been removed to the federal court from state courts in Mississippi and elsewhere. The Court’s opinion harshly criticized the x-ray screening and recruitment practices by the plaintiffs’ lawyers, the screening companies and the physicians they employed. The Court also remanded almost all of the cases to the state courts where they had initially been filed.
Employment Litigation
In July 2005, a former Austin, Texas-based employee of the Company filed a charge of age discrimination with the Texas Workforce Commission Civil Rights Division and the Equal Employment Opportunity Commission. The charge alleges various forms of employment discrimination on the basis of age on behalf of all former and current employees who were age 40 and older when employed by the Company during an unspecified period in salaried positions below a certain salary grade, except current employees employed by the Company in Minnesota and former employees employed by the Company in Minnesota who have not signed releases. It appears the charge excludes those former and current employees of the Company who are described in the previously disclosed purported class action in the District Court of Ramsey County, Minnesota filed in December 2004. The charge further alleges that the release of claims signed by certain former employees in the purported class defined in the charge is invalid for various reasons.
Environmental Matters and Litigation
Regulatory Activities: The Company has been voluntarily cooperating with ongoing reviews by local, state, national (primarily the U.S. Environmental Protection Agency (EPA)), and international agencies of possible environmental and health effects of perfluorooctanyl compounds (perflurooctanoic acid or “PFOA” and perfluorooctane sulfonate or “PFOS”). As a result of its phase-out decision in May 2000, the Company no longer manufactures perfluorooctanyl compounds except that a subsidiary recovers and recycles PFOA for internal use in production processes.
On June 27, 2005 a panel of the Science Advisory Board (SAB) associated with the EPA that was asked by the EPA to address specific questions regarding the EPA’s January 12, 2005 draft risk assessment of potential human health effects of exposure to PFOA issued a draft report that is inconsistent with the EPA draft risk assessment in significant respects. Although covered by the news media, the draft report is preliminary and states that it is not to be quoted or cited and that it does not reflect consensus advice or represent EPA policy. The Company disagrees with aspects of the draft report and has provided comments with respect to it. The panel’s draft report is subject to additional proceedings before the SAB issues a final report to the EPA, which in turn will make a final risk assessment.
The Company and state agencies tested groundwater beneath three former waste disposal sites in Washington County, Minnesota, used many years ago by the Company to dispose of waste containing perfluorooctanyl compounds. The test results show that water from certain municipal wells in Oakdale, Minnesota near two of the former disposal sites and some private wells in that vicinity contain low levels of PFOS and PFOA. The Minnesota Pollution Control Agency is providing carbon filters for a small number of private wells measuring above a level established by the Minnesota Department of Health. On its own initiative, the Company proposed and has reached an agreement in principle with the City of Oakdale under which the Company will at its own expense construct, operate and maintain for at least five years a granular activated carbon water treatment system to treat one or more of Oakdale’s municipal wells. No perfluorooctanyl compounds have been detected in private wells in the vicinity of the third former disposal site in Washington County. The Company has provided the test results from these private and municipal wells to the EPA.
Litigation. Following dismissal of medical monitoring and public nuisance claims in the purported class action pending in the District Court for Washington County, Minnesota brought by six county residents involving alleged emissions from the former perfluorooctanyl production facility at Cottage Grove, Minnesota, the plaintiffs filed an amended complaint. The Company filed a motion for summary judgment regarding certain claims in the plaintiffs’ amended complaint and other pre-trial proceedings are in progress. Counsel for plaintiffs in this case obtained and tested blood samples from individuals purportedly in the vicinity of the former perfluorooctanyl production facility at Cottage Grove, Minnesota and reported their results to the EPA. The levels of PFOA purportedly detected in some of the human blood samples were higher than, and the levels of PFOS in the samples were within the range of, the levels found by the Company in its 2000 study of the blood sera from the general population, but with respect to each compound the levels were below levels typically found in 3M production workers and in the Company’s view are not a cause of concern.
14
Effective January 1, 2005, as part of the continuing effort to drive growth by aligning businesses around markets and customers, the Electronics Markets Materials Division and certain high temperature and display tapes (2004 sales of approximately $350 million) within the Industrial Business transferred to the Electro and Communications Business, and the converter markets product line (2004 sales of approximately $10 million) within the Transportation Business transferred to the Display and Graphics Business. Internal management reporting for these business segment transfers commenced January 1, 2005, with segment information for all periods presented adjusted to reflect the new segment structure.
3M included supplemental unaudited business segment information in its Quarterly Report on Form 10-Q for the period ended March 31, 2005 (Note 8 to the Consolidated Financial Statements). This was provided on both an annual and quarterly basis for the years ended December 31, 2004, 2003 and 2002, reflecting adjusted historical information for the new segment structure that was effective January 1, 2005.
|
Business Segment Information |
|
Three months ended |
|
Six months ended |
|
||||||||
|
(Millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
NET SALES |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Health Care |
|
$ |
1,112 |
|
$ |
1,049 |
|
$ |
2,225 |
|
$ |
2,080 |
|
|
Industrial |
|
927 |
|
867 |
|
1,831 |
|
1,723 |
|
||||
|
Display and Graphics |
|
864 |
|
884 |
|
1,726 |
|
1,729 |
|
||||
|
Consumer and Office |
|
735 |
|
675 |
|
1,434 |
|
1,361 |
|
||||
|
Safety, Security and Protection Services |
|
599 |
|
547 |
|
1,156 |
|
1,074 |
|
||||
|
Electro and Communications |
|
594 |
|
572 |
|
1,151 |
|
1,123 |
|
||||
|
Transportation |
|
447 |
|
409 |
|
914 |
|
844 |
|
||||
|
Corporate and Unallocated |
|
16 |
|
9 |
|
23 |
|
17 |
|
||||
|
Total Company |
|
$ |
5,294 |
|
$ |
5,012 |
|
$ |
10,460 |
|
$ |
9,951 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
OPERATING INCOME |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Health Care |
|
$ |
310 |
|
$ |
274 |
|
$ |
619 |
|
$ |
536 |
|
|
Industrial |
|
189 |
|
158 |
|
373 |
|
312 |
|
||||
|
Display and Graphics |
|
277 |
|
312 |
|
563 |
|
606 |
|
||||
|
Consumer and Office |
|
140 |
|
123 |
|
262 |
|
245 |
|
||||
|
Safety, Security and Protection Services |
|
151 |
|
136 |
|
284 |
|
261 |
|
||||
|
Electro and Communications |
|
118 |
|
89 |
|
221 |
|
166 |
|
||||
|
Transportation |
|
121 |
|
105 |
|
247 |
|
224 |
|
||||
|
Corporate and Unallocated |
|
(23 |
) |
(11 |
) |
(62 |
) |
(47 |
) |
||||
|
Total Company |
|
$ |
1,283 |
|
$ |
1,186 |
|
$ |
2,507 |
|
$ |
2,303 |
|
Corporate and unallocated operating income includes a variety of miscellaneous items and is subject to fluctuation on a quarterly and annual basis. Second quarter 2005 corporate and unallocated operating income includes a net cost related to an increase in the respirator mask/asbestos litigation reserves, partially offset by an increase in the associated insurance receivables (see Note 8 to the Consolidated Financial Statements). First quarter 2005 corporate and unallocated operating income includes an expense related to the previously disclosed proposed settlement of the indirect tape purchasers’ antitrust class action (see Note 8 to the Consolidated Financial Statements). First quarter 2004 corporate and unallocated operating income includes an expense related to a reduction in breast implant insurance receivables, primarily related to an arbitration panel ruling in the first quarter of 2004 that rejected the Company’s claims for recovery under certain of its claims-made policies.
15
Effective January 1, 2005, the company realigned its reporting for the African Region, which previously was included in the Latin America/Canada area, to the Europe and Middle East area. 3M included supplemental geographic area information in its Form 10-Q for the period ended March 31, 2005 (Note 9 to the Consolidated Financial Statements). This was provided on an annual basis for the years ended December 31, 2004, 2003 and 2002, reflecting adjusted historical information for 3M’s new geographic area structure that was effective January 1, 2005.
NOTE 11. Review Report of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, has performed reviews of the unaudited interim consolidated financial statements included herein, and their review report thereon accompanies this filing. Pursuant to Rule 436(c) of the Securities Act of 1933 (“Act”) their report on these reviews should not be considered a “report” within the meaning of Sections 7 and 11 of the Act and the independent registered public accounting firm liability under Section 11 does not extend to it.
16
To the Stockholders and Board of Directors of 3M Company:
We have reviewed the accompanying consolidated balance sheet of 3M Company and its subsidiaries as of June 30, 2005, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2005 and 2004, and of cash flows for the six-month periods ended June 30, 2005 and 2004. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of income, of changes in stockholders’ equity and comprehensive income, and of cash flows for the year then ended, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004; and in our report dated February 14, 2005, we expressed unqualified opinions thereon. The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2004, 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
Minneapolis, Minnesota
July 18, 2005, except as to Note 2,
for which the date is August 2, 2005
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products. 3M manages its operations in seven operating business segments: Health Care; Industrial; Display and Graphics; Consumer and Office; Safety, Security and Protection Services; Electro and Communications; and Transportation.
During the second quarter of 2005, 3M completed its evaluation of the repatriation provision of the American Jobs Creation Act of 2004 and will reinvest approximately $1.7 billion of foreign earnings into the U.S. pursuant to its provisions. As a consequence, in the second quarter of 2005, 3M recorded a tax expense of $75 million, net of available foreign tax credits. For the three months ended June 30, 2005, 3M reported net sales of $5.294 billion and net income of $776 million, or $1.00 per diluted share (which includes this tax expense), compared with net sales of $5.012 billion and net income of $773 million, or $.97 per diluted share, for the three months ended June 30, 2004. The combination of a 5.6% increase in net sales and declining operating expenses as a percent of sales resulted in a 24.2% operating income profit margin for the three months ended June 30, 2005, compared with 23.7% in the same period last year. The following table summarizes sales and operating income results by business segment.
|
|
|
Three months ended June 30 |
|
|
|
|
|
|||||||||||
|
|
|
2005 |
|
2004 |
|
% change |
|
|||||||||||
|
(Millions) |
|
Net |
|
Oper. |
|
Net |
|
Oper. |
|
Net |
|
Oper. |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Health Care |
|
$ |
1,112 |
|
$ |
310 |
|
$ |
1,049 |
|
$ |
274 |
|
6.1 |
% |
13.2 |
% |
|
|
Industrial |
|
927 |
|
189 |
|
867 |
|
158 |
|
7.0 |
% |
19.8 |
% |
|||||
|
Display and Graphics |
|
864 |
|
277 |
|
884 |
|
312 |
|
(2.2 |
)% |
(11.3 |
)% |
|||||
|
Consumer and Office |
|
735 |
|
140 |
|
675 |
|
123 |
|
9.0 |
% |
13.8 |
% |
|||||
|
Safety, Security and Protection Services |
|
599 |
|
151 |
|
547 |
|
136 |
|
9.6 |
% |
11.5 |
% |
|||||
|
Electro andCommunications |
|
594 |
|
118 |
|
572 |
|
89 |
|
3.8 |
% |
32.9 |
% |
|||||
|
Transportation |
|
447 |
|
121 |
|
409 |
|
105 |
|
9.6 |
% |
15.6 |
% |
|||||
|
Corporate and Unallocated |
|
16 |
|
(23 |
) |
9 |
|
(11 |
) |
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total Company |
|
$ |
5,294 |
|
$ |
1,283 |
|
$ |
5,012 |
|
$ |
1,186 |
|
5.6 |
% |
8.2 |
% |
|
Sales growth for the three months ended June 30, 2005, was broad-based, with growth of 9% or more in the Safety, Security and Protection Services; Transportation; and Consumer and Office segments. Industrial sales growth was led by industrial adhesives and tapes, as well as the abrasives businesses. Health Care sales growth was broad-based, led by medical, orthodontics, drug delivery and health information systems, but tempered by the impact of increased pricing and competitive pressures in 3M’s Personal Care and Related products business and a slowdown in the growth rate of sales in 3M’s Aldara™ pharmaceutical product. Electro and Communications sales were led by 3M’s electronic and electrical products, but hurt by continued softness in the telecom industry and increasing competition in the flex circuit business. Display and Graphics was impacted by difficult comparisons against a strong second quarter in 2004, and was also negatively impacted by the fourth-quarter 2004 phase out of the commercial videotape business and the continued decline in demand for lens systems for the CRT rear-projection television market. Refer to the Performance by Business Segment section for a more detailed discussion of the results of the respective segments.
Geographically, Asia Pacific led local-currency sales growth (defined as volume plus selling price) in the second quarter of 2005, with an increase of 5.6%. Local-currency sales increased 4.5% in the United States, increased 0.9% in the combined Latin America and Canada area, and increased 0.7% in Europe. Currency effects increased international sales by 3.4%. Foreign currency translation positively impacted the combined Latin America and Canada area sales by 9.3%, Europe sales by 3.0%, and Asia Pacific sales by 1.9%, as the U.S. dollar weakened against these currencies.
Operating income improvement for the three months ended June 30, 2005, was broad-based, with six of 3M’s seven business segments posting double-digit increases. In Electro and Communications, strong operational focus and portfolio management resulted in 32.9% operating income growth. Operating income for 3M in total in the
18
second quarter was 24.2% of sales. Currency impacts boosted second quarter 2005 operating income by an estimated $30 million.
3M generated $2.171 billion of operating cash flows for the six months ended June 30, 2005, a $66 million decrease compared to the six months ended June 30, 2004. While higher net income and tax timing differences increased cash flows, higher accounts receivable and inventory balances decreased cash flows. Cash and cash equivalents and marketable securities as of June 30, 2005, totaled $1.773 billion. For the six months ended June 30, 2005, the Company utilized $1.832 billion of cash to repurchase 3M common stock and pay dividends. 3M’s debt to total capital ratio (total capital defined as debt plus equity) as of June 30, 2005, was 15%. The Company expects its debt levels to increase in the third quarter as a result of 3M’s acquisition of CUNO, Incorporated. Refer to Note 2 to the Consolidated Financial Statements for additional discussion of CUNO, Incorporated. 3M has an AA credit rating from Standard & Poor’s and an Aa1 credit rating from Moody’s Investors Service.
3M believes it will continue to deliver strong financial performance during the remainder of 2005 spurred by higher sales growth, while facing an environment of rising raw material prices, more competitive conditions and a slowing rate of growth in mature economies.
Effective June 30, 2005, W. James McNerney, Jr. resigned as Chairman of the Board and Chief Executive Officer of the Company, and Robert S. Morrison, a Company director since 2002, was elected 3M interim Chairman and Chief Executive Officer. Mr. Morrison is a retired vice chairman of Pepsico, Inc. and former chief executive officer of Quaker Oats Co. The Company has initiated a selection process that is considering both internal and external candidates.
Percent change information compares the second quarter and first six months of 2005 with the same periods last year, unless otherwise indicated.
Net Sales:
|
|
|
Three months ended |
|
Six months ended |
|
||||||||||||||
|
|
|
Worldwide |
|
U.S. |
|
International |
|
Worldwide |
|
U.S. |
|
International |
|
||||||
|
Net sales (millions) |
|
$ |
5,294 |
|
$ |
2,065 |
|
$ |
3,229 |
|
$ |
10,460 |
|
$ |
4,001 |
|
$ |
6,459 |
|
|
Components of net sales change: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Volume – core |
|
2.7 |
% |
2.4 |
% |
2.9 |
% |
2.0 |
% |
1.8 |
% |
2.3 |
% |
||||||
|
Volume – acquisitions |
|
— |
|
0.1 |
|
— |
|
0.2 |
|
0.3 |
|
0.1 |
|
||||||
|
Volume – total |
|
2.7 |
|
2.5 |
|
2.9 |
|
2.2 |
|
2.1 |
|
2.4 |
|
||||||
|
Price |
|
0.8 |
|
2.0 |
|
— |
|
0.7 |
|
1.8 |
|
(0.1 |
) |
||||||
|
Total local-currency sales |
|
3.5 |
|
4.5 |
|
2.9 |
|
2.9 |
|
3.9 |
|
2.3 |
|
||||||
|
Translation |
|
2.1 |
|
— |
|
3.4 |
|
2.2 |
|
— |
|
3.6 |
|
||||||
|
Total sales change |
|
5.6 |
% |
4.5 |
% |
6.3 |
% |
5.1 |
% |
3.9 |
% |
5.9 |
% |
||||||
In the second quarter and first six months of 2005, local-currency sales growth was broad based. 3M’s pricing strategy resulted in U.S. price growth of 2.0% in the second quarter and 1.8% for the first six months of 2005. Internationally, selling prices were flat. Adjusting for the price decreases in LCD films and flex circuits, international pricing would have increased 0.4% for the second quarter and first six months of 2005. Refer to the “Performance by Business Segment” section for additional discussion of sales change by segment.
On a geographic basis, all seven businesses in the Asia Pacific area posted local-currency sales growth in the second quarter and first six months of 2005, led by Electro and Communications; Consumer and Office; and Health Care. In the second quarter, Asia Pacific local-currency sales increased 5.6%, with Japan local-currency sales down 1.0% and the rest of the Asia Pacific area up 9.9%. The Company posted 0.9% local-currency sales growth in the second quarter in the combined Latin America and Canada area, with strong growth in core businesses, led by Consumer and Office; Transportation; and the Safety, Security and Protection Services businesses. U.S. sales growth in the second quarter was 4.5%, led by Consumer and Office; Safety, Security and Protection Services; Transportation; and the Industrial businesses. In Europe, local-currency second-quarter sales increased 0.7%, as the economies in Western Europe remained sluggish. For the first six months of 2005, local-currency growth was 6.3% in the Asia Pacific area, 3.9% in the United States and 2.0% in the combined Latin America and Canada area. For the first six months of 2005, local-currency sales declined 1.5% in Europe.
19
Operating Expenses:
|
(Percent of net sales) |
|
Three months ended |
|
Six months ended |
|
||||||||
|
June 30 |
|
June 30 |
|
||||||||||
|
2005 |
|
2004 |
|
Change |
|
2005 |
|
2004 |
|
Change |
|
||
|
Cost of sales |
|
49.0 |
% |
48.9 |
% |
0.1 |
% |
49.0 |
% |
49.1 |
% |
(0.1 |
)% |
|
Selling, general and administrative expenses |
|
21.2 |
|
21.6 |
|
(0.4 |
) |
21.4 |
|
22.0 |
|
(0.6 |
) |
|
Research, development and related expenses |
|
5.6 |
|
5.8 |
|
(0.2 |
) |
5.6 |
|
5.8 |
|
(0.2 |
) |
|
Operating income |
|
24.2 |
% |
23.7 |
% |
0.5 |
% |
24.0 |
% |
23.1 |
% |
0.9 |
% |
Cost of sales as a percent of net sales was relatively flat in the second quarter and first six months of 2005. Cost of sales was helped by corporate initiatives, productivity gains, selling price increases, favorable product mix and positive currency impacts. Raw material costs increased approximately 6% for the second quarter and first six months of 2005 when compared to the same periods in 2004. Cost of sales includes manufacturing, engineering and freight costs.
Selling, general and administrative (SG&A) expenses as a percent of net sales were down about half of one percentage point in the second quarter and first six months of 2005 compared to the same periods in 2004, driven by incremental sales leverage and 3M’s continued focus on cost discipline.
Operating Income:
3M uses operating income as one of its primary business segment performance measurement tools. Operating income has steadily improved the past few years, helped by solid sales growth and positive benefits from 3M’s corporate initiatives. In the second quarter of 2005, operating income totaled 24.2% of sales, and for the first six months of 2005 totaled 24.0% of sales.
Interest Expense and Income:
|
|
|
Three months ended |
|
Six months ended |
|
||||||||
|
|
|
June 30 |
|
June 30 |
|
||||||||
|
(Millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
Interest expense |
|
$ |
19 |
|
$ |
16 |
|
$ |
39 |
|
$ |
35 |
|
|
Interest income |
|
(16 |
) |
(10 |
) |
(32 |
) |
(20 |
) |
||||
|
Total |
|
$ |
3 |
|
$ |
6 |
|
$ |
7 |
|
$ |
15 |
|
Interest expense increased slightly for the second quarter and first six months of 2005 compared to the same periods in 2004, primarily due to higher interest rates. Interest income was higher in the second quarter and first six months of 2005, benefiting from higher average cash balances and higher interest rates.
Provision for Income Taxes:
|
|
|
Three months ended |
|
Six months ended |
|
||||
|
(Percent of |
|
June 30 |
|
June 30 |
|
||||
|
pre-tax income) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
Effective tax rate |
|
38.4 |
% |
33.0 |
% |
35.5 |
% |
33.0 |
% |
The tax rate for the second quarter of 2005 was 38.4%, compared with 33.0% in the second quarter of 2004. During the second quarter of 2005, 3M completed its evaluation of the repatriation provision of the American Jobs Creation Act of 2004 (Jobs Act) and will reinvest approximately $1.7 billion of foreign earnings into the U.S. pursuant to its provisions. The Company will continue to evaluate additional repatriation opportunities through the end of 2005. The Jobs Act provides 3M the opportunity to tax effectively repatriate foreign earnings for U.S. qualifying investments specified by 3M’s domestic reinvestment plan. As a consequence, in the second quarter of 2005, 3M recorded a tax expense of $75 million, net of available foreign tax credits. Excluding this tax expense, the second quarter and first six months 2005 tax rate would be 32.5%. A half-point tax rate reduction compared to the same periods last year is primarily attributable to the combination of the effects of the Medicare Modernization Act and the domestic manufacturer’s deduction, which was a part of the Jobs Act.
20
Minority Interest:
|
(Millions) |
|
Three months ended |
|
Six months ended |
|
||||||||
|
June 30 |
|
June 30 |
|
||||||||||
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||||
|
Minority Interest |
|
$ |
12 |
|
$ |
18 |
|
$ |
27 |
|
$ |
38 |
|
Minority interest represents the elimination of the non-3M ownership interests, primarily in Sumitomo 3M Limited (3M owns 75% of Sumitomo 3M Limited). The decrease in the second quarter and first six months of 2005 related primarily to lower profits in Sumitomo 3M.
Currency Effects:
3M estimates that year-on-year currency effects, including hedging impacts, increased net income by approximately $20 million in the second quarter and approximately $55 million in the six months ended June 30, 2005. 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 foreign currency exchange rate risks. 3M estimates that year-on-year derivative and other transaction gains and losses had no impact in the second quarter, but increased net income by approximately $15 million for the six months ended June 30, 2005, benefiting from lower year-on-year hedging losses.
Accounting Pronouncements:
Information regarding accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.
PERFORMANCE BY BUSINESS SEGMENT
Disclosures relating to 3M’s business segments are provided in Note 9 to the Consolidated Financial Statements.
Information related to 3M’s business segments is presented in the tables that follow. Local-currency sales (which includes both core and acquisition volume impacts plus price impacts) are provided for each segment. The translation impact and total sales change are also provided for each segment. Operating income in all segments benefited from continued savings from 3M’s corporate initiatives and positive currency effects.
Health Care Business:
|
|
|
Three months ended |
|
Six months ended |
|
||||||||
|
|
|
June 30 |
|
June 30 |
|
||||||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
Sales (millions) |
|
$ |
1,112 |
|
$ |
1,049 |
|
$ |
2,225 |
|
$ |
2,080 |
|
|
Sales change analysis: |
|
|
|
|
|
|
|
|
|
||||
|
Local currency (volume and price) |
|
3.8 |
% |
0.3 |
% |
4.5 |
% |
1.3 |
% |
||||
|
Translation |
|
2.3 |
|
2.8 |
|
2.5 |
|
4.7 |
|
||||
|
Total sales change |
|
6.1 |
% |
3.1 |
% |
7.0 |
% |
6.0 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Operating income (millions) |
|
$ |
310 |
|
$ |
274 |
|
$ |
619 |
|
$ |
536 |
|
|
Percent change |
|
13.2 |
% |
4.0 |
% |
15.6 |
% |
6.8 |
% |
||||
|
Percent of sales |
|
27.9 |
% |
26.1 |
% |
27.8 |
% |
25.7 |
% |
||||
The Health Care segment serves markets that include medical, surgical, pharmaceutical, dental and orthodontic, health information systems and personal care. Products provided to these markets include medical and surgical supplies, skin health and infection prevention products, pharmaceuticals, drug delivery systems, dental and orthodontic products, health information systems, microbiology products, and closures for disposable diapers.
Health Care reported local-currency sales growth of 3.8% for the second quarter and 4.5% for the first six months of 2005. Sales growth in the second quarter and first six months was broad based, led by the medical, orthodontics, drug delivery and health information systems businesses. 3M’s personal care diaper tape business negatively impacted local-currency sales growth in the second quarter of 2005, hurt by competitive pressures and lower volumes as 3M raised prices. In addition, in the second quarter of 2005, 3M experienced a slowdown in the growth rate of sales in 3M’s Aldara™ pharmaceutical product, which received approvals in 2004 for use in the treatment of actinic keratosis (a pre-cancerous skin condition) and superficial basal cell carcinoma (a common form of non-melanoma skin cancer). Operating income increased 13.2% in the second quarter of 2005, and was up 15.6% for the first six months of 2005.
21
3M and Takeda Pharmaceutical Co. Ltd. have entered into an agreement to collaborate on a potential breakthrough treatment utilizing an immune response modifier for cervical high-risk human papilloma virus (HPV) infection and cervical dysplasia, which are known risk factors for cervical cancer. This immune response modifier currently is in early stage clinical trials, and 3M and Takeda will share further development costs. Upon successful clinical development and regulatory approvals, the parties will commercialize jointly in the United States and Europe. Takeda will hold commercial rights in certain countries in Asia, while 3M will retain the rights in other parts of the world.
Industrial Business:
|
|
|
Three months ended |
|
Six months ended |
|
||||||||
|
|
|
June 30 |
|
June 30 |
|
||||||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
Sales (millions) |
|
$ |
927 |
|
$ |
867 |
|
$ |
1,831 |
|
$ |
1,723 |
|
|
Sales change analysis: |
|
|
|
|
|
|
|
|
|
||||
|
Local currency (volume and price) |
|
4.1 |
% |
10.7 |
% |
3.4 |
% |
8.8 |
% |
||||
|
Translation |
|
2.9 |
|
2.7 |
|
2.9 |
|
4.5 |
|
||||
|
Total sales change |
|
7.0 |
% |
13.4 |
|||||||||