01—Abstract
Summary
Summary of the 10-K filed March 10, 1998. Cited figures are marked; the original filing is the authoritative source.
3M's 1997 10-K shows a company with solid operating momentum: net sales rose 5.9% to $15.07 billiona, operating income grew 7.4% to $2.675 billion, and worldwide volume rose 11%, with U.S. volume up 9% and international volume up 13%.
Reported net income of $2.121 billionb ($5.14 basic EPS) was inflated by an $803 million pre-tax gain on the August 1997 sale of National Advertising Company. Excluding that gain, net income was $1.626 billion, or $3.94 per basic share, and per-share earnings rose about 8.5% versus 1996. Currency translation was a meaningful drag, reducing income from continuing operations by an estimated $112 million, or 27 cents per share, and management guided that a strong dollar could cut 1998 EPS by more than 25 cents.
The balance sheet and capital allocation shifted noticeably. Total debt rose to $2.514 billionc from $1.968 billion, lifting debt to 30% of total capital from 24%. Management used proceeds from the divestiture and new borrowing to repurchase $1.693 billion of stock in 1997 and plans to reduce shares outstanding to about 390 million by year-end 1998.
Moody's and S&P both downgraded 3M's debt ratings (to Aa1 and AA) in February 1998, citing this rising leverage. Cash flow from continuing operations fell to $1.818 billiond from $2.041 billion, partly due to $308 million of taxes on the divestiture gain. The most significant risk flagged for investors is the breast implant litigation.
3M faced 7,547 lawsuits and 285 claims covering 26,193 claimants, has paid $162 million into a court-administered settlement fund, and carries $292 million in accrued liabilities. It also holds $666 million in insurance receivables, substantially all of which insurers contest, and the outcome of Minnesota coverage litigation could materially affect those recoveries. Management believes insurance coverage is sufficient to cover current exposure, but it acknowledges that future charges could hit quarterly net income.
02—Key points
Key Highlights
- Net sales grew 5.9% to $15.07 billion in 1997, with volume up 11% worldwide, though a stronger U.S. dollar reduced sales by about 5 points.
- Reported 1997 EPS of $5.14 included an $803 million pre-tax ($495 million after-tax, $1.20 per share) gain on the sale of National Advertising Company; excluding the gain, EPS was $3.94 (basic).
- Operating income rose 7.4% to $2.675 billion, with operating margin improving to 17.7% of sales from 17.5% in 1996.
- Total debt climbed to $2.514 billion (30% of total capital, up from 24%), and 3M repurchased $1.693 billion of its own stock in 1997.
- Moody's (to Aa1) and S&P (to AA) downgraded 3M's long-term debt ratings in February 1998, citing rising leverage from the buyback and debt-funded capital structure changes.
- Breast implant litigation remains the key risk: 7,547 lawsuits and 285 claims, $292 million in accrued liabilities, and $666 million in contested insurance receivables.
- Management guided to solid 1998 sales and earnings growth, targeting 8% annual productivity improvement, a 1998 share count of about 390 million, and capital spending near $1.4 billion; it also flagged a currency headwind of more than 25 cents per share.
03—Questions
Frequently Asked Questions
How much of 1997's reported earnings growth came from the one-time divestiture gain?
A large share. Reported net income of $2.121 billion includes a $495 million after-tax gain on the National Advertising Company sale. Excluding that gain, net income was $1.626 billion, or $3.94 per basic share, compared with $1.526 billion, or $3.65 per share, in 1996. That underlying figure represents growth of about 8% per share, well below the headline $5.14 figure.
Why is 3M's debt rising, and why did the credit ratings get downgraded?
3M increased share repurchases ($1.693 billion in 1997) and issued debt to fund its capital structure changes. Total debt rose to $2.514 billion from $1.968 billion, and debt as a share of total capital increased to 30% from 24%. Moody's and S&P cited this growth in leverage as the reason for lowering 3M's ratings from Aaa/AAA to Aa1/AA in February 1998. Management plans to take debt above $3 billion on average in 1998, which could add up to $70 million in interest expense.
How serious is the breast implant litigation for 3M's finances?
It is a significant contingent liability, but management believes it is manageable. 3M has paid $162 million into a court-administered settlement fund and carries $292 million in accrued liabilities, after $699 million in payments to date. It also has $666 million of insurance receivables, substantially all of which are contested by carriers. Management says insurance coverage is probably sufficient to cover current exposure, but an adverse outcome in the Minnesota insurance litigation could leave 3M without material coverage, and new developments could trigger charges that hit quarterly net income.
What is the outlook for 1998, and what are the main headwinds?
Management expects solid sales and earnings growth in 1998. The main headwinds are currency: based on late-January 1998 exchange rates, the strong dollar could reduce 1998 earnings by more than 25 cents per share, mostly in the first half. Management also expects no earnings contribution from Asia in 1998 because of economic and financial turmoil there, and a sluggish Brazilian economy in the first half. Capital spending is expected to stay around $1.4 billion, and the company targets an 8% annual productivity improvement.
What did 3M's core business look like apart from the divestiture?
The core business grew steadily. The Industrial and Consumer sector delivered sales of $9.484 billion, up 6.2%, with operating income up 7.2%. The Life Sciences sector reached $5.496 billion in sales, up 4.9%, but its operating income fell 2.3% to $1.066 billion, partly because it sold National Advertising Company. Geographically, U.S. sales rose about 9% on strong volume, while Asia Pacific sales were held back by currency translation, which reduced them by about 10%.
04—Continue