How much exposure does 3M have to breast implant litigation, and is it adequately reserved?

As of December 31, 1996, 3M had been named in 6,715 claims and lawsuits representing 21,431 claimants. The company raised its estimate of minimum probable liabilities to about $991 million in Q2 1996. After $525 million in payments, $466 million was accrued at year-end. Management says its $864 million in insurance receivables covers substantially all current exposure, and it believes additional charges would not materially affect financial position or annual results. Future charges could still hit quarterly net income materially, and the company cannot estimate liabilities beyond its current estimate.

What could cause the insurance recoveries behind 3M's implant reserves to fall short?

Most insurers have reserved their rights to deny all or part of coverage, disputing allocation among insurers and which policies are triggered. A Minnesota trial began in June 1996 and is continuing in phases. The court ruled on the trigger question for 3M but adopted an allocation method that will still be applied to specific policies. If occurrence insurers prevail, 3M could be effectively deprived of significant coverage. Other risks include potential arbitration with claims-made insurers, payment delays, and insurer insolvency.

How did the Imation spin-off and discontinued operations affect 3M's reported results?

The data storage and imaging businesses were spun off to shareholders in June 1996 as Imation Corp., a special dividend of one Imation share for every 10 3M shares, which reduced retained earnings by $1.008 billion. The audio and video business was discontinued. Both are presented as discontinued operations, and 1995 includes a $373 million loss on disposal. Investors should focus on continuing-operations results: income from continuing operations was $1.516 billion in 1996 versus $1.306 billion in 1995, and net income was $1.526 billion.

What is 3M's outlook for 1997, and what are the long-term growth targets?

Management expects solid sales and earnings growth in 1997, supported by new product programs, international expansion, supply chain efficiency, and productivity gains. Currency could reduce 1997 earnings by about 15 cents per share at January 1997 exchange rates, and capital spending is expected to rise to about $1.3 billion. Share count is expected to fall by about 4 million. For 1997–1999, 3M aims for roughly 10% annual sales growth, 12–13% operating income growth, and 13–14% EPS growth. These are forward-looking aims subject to currency, economic, raw material, and legal risks.

Is 3M's dividend secure, and how is the company returning capital to shareholders?

The dividend looks secure. Dividends paid totaled $803 million in 1996, the payout was $1.92 per share, and the company has paid dividends since 1916. In February 1997 the quarterly dividend was raised 10.4% to $0.53 per share, the 39th consecutive annual increase. Operating cash flow from continuing operations of $2.041 billion covered capital spending of $1.109 billion and dividends. Share repurchases totaled $532 million in 1996, and the board authorized up to 10 million additional shares for repurchase through December 31, 1997.

MMM 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 11, 1997. Cited figures are marked; the original filing is the authoritative source.

3M's 1996 10-K shows a company at a strong operating peak, with continuing-operations net sales up 5.8% to $14.236 billion^a and operating income up 12.2% to $2.491 billion, helped by volume growth of 8% and a 1% price increase despite roughly 3 points of currency translation drag.

Income from continuing operations rose 16% to $1.516 billion^b, or $3.63 per share, and reported net income was $1.526 billion, or $3.65 per share. Return on average stockholders' equity reached 24.4%, and management guided to solid sales and earnings growth in 1997 and a 1997–1999 aim of roughly 10% annual sales growth, 12–13% operating income growth, and 13–14% EPS growth. The central investor issue is the breast implant litigation.

As of December 31, 1996, 3M faced 6,715 suits covering 21,431 claimants. The company has accrued $466 million^c against a minimum probable liability of about $991 million, and it carries $864 million in insurance recovery receivables. Those receivables depend on the outcome of coverage litigation in Minnesota and Texas, where insurers dispute trigger and allocation.

Management says the exposure is substantially covered and that any additional charges would not have a material effect on financial position or annual results, though a charge could hit a single quarter's net income materially. The balance sheet is solid, with AAA/Aaa long-term ratings, a current ratio of 1.7, and total debt of $1.968 billion^d, or 24% of capital.

Cash flow from continuing operations was $2.041 billion against capital spending of $1.109 billion, and the dividend was raised 10.4% to an annualized $2.12. The Imation Corp. spin-off, a $1.008 billion reduction in retained earnings, and the 1995 audio and video exit mean reported results are not fully comparable to prior periods, so investors should focus on continuing-operations figures.

02—Key points

Key Highlights

Net sales from continuing operations rose 5.8% to $14.236 billion in 1996, with worldwide volume up 8% and selling prices up about 1%, offset by roughly 3 points of currency translation drag.
Operating income increased 12.2% to $2.491 billion, and the operating margin improved to 17.5% from 17.1% excluding the 1995 restructuring charge.
Income from continuing operations was $1.516 billion, or $3.63 per share, up from $3.11 in 1995 (which included a restructuring charge), and return on average equity reached 24.4%.
Breast implant litigation is the key risk: 6,715 suits covering 21,431 claimants, $466 million in accrued liabilities against a roughly $991 million minimum estimate, and $864 million in insurance receivables that depend on pending coverage litigation.
The balance sheet remains strong, with AAA/Aaa ratings, total debt at 24% of capital, operating cash flow of $2.041 billion from continuing operations, and capital spending of $1.109 billion.
The board raised the quarterly dividend 10.4% to $0.53 per share (annualized $2.12), the 39th consecutive annual increase, and authorized repurchase of up to 10 million shares through 1997.
Management guided to solid 1997 sales and earnings growth and targets 1997–1999 annual growth of about 10% in sales, 12–13% in operating income, and 13–14% in EPS.

03—Questions

Frequently Asked Questions

How much exposure does 3M have to breast implant litigation, and is it adequately reserved?
As of December 31, 1996, 3M had been named in 6,715 claims and lawsuits representing 21,431 claimants. The company raised its estimate of minimum probable liabilities to about $991 million in Q2 1996. After $525 million in payments, $466 million was accrued at year-end. Management says its $864 million in insurance receivables covers substantially all current exposure, and it believes additional charges would not materially affect financial position or annual results. Future charges could still hit quarterly net income materially, and the company cannot estimate liabilities beyond its current estimate.
What could cause the insurance recoveries behind 3M's implant reserves to fall short?
Most insurers have reserved their rights to deny all or part of coverage, disputing allocation among insurers and which policies are triggered. A Minnesota trial began in June 1996 and is continuing in phases. The court ruled on the trigger question for 3M but adopted an allocation method that will still be applied to specific policies. If occurrence insurers prevail, 3M could be effectively deprived of significant coverage. Other risks include potential arbitration with claims-made insurers, payment delays, and insurer insolvency.
How did the Imation spin-off and discontinued operations affect 3M's reported results?
The data storage and imaging businesses were spun off to shareholders in June 1996 as Imation Corp., a special dividend of one Imation share for every 10 3M shares, which reduced retained earnings by $1.008 billion. The audio and video business was discontinued. Both are presented as discontinued operations, and 1995 includes a $373 million loss on disposal. Investors should focus on continuing-operations results: income from continuing operations was $1.516 billion in 1996 versus $1.306 billion in 1995, and net income was $1.526 billion.
What is 3M's outlook for 1997, and what are the long-term growth targets?
Management expects solid sales and earnings growth in 1997, supported by new product programs, international expansion, supply chain efficiency, and productivity gains. Currency could reduce 1997 earnings by about 15 cents per share at January 1997 exchange rates, and capital spending is expected to rise to about $1.3 billion. Share count is expected to fall by about 4 million. For 1997–1999, 3M aims for roughly 10% annual sales growth, 12–13% operating income growth, and 13–14% EPS growth. These are forward-looking aims subject to currency, economic, raw material, and legal risks.
Is 3M's dividend secure, and how is the company returning capital to shareholders?
The dividend looks secure. Dividends paid totaled $803 million in 1996, the payout was $1.92 per share, and the company has paid dividends since 1916. In February 1997 the quarterly dividend was raised 10.4% to $0.53 per share, the 39th consecutive annual increase. Operating cash flow from continuing operations of $2.041 billion covered capital spending of $1.109 billion and dividends. Share repurchases totaled $532 million in 1996, and the board authorized up to 10 million additional shares for repurchase through December 31, 1997.

04—Continue

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