01—Abstract
Summary
Summary of the 10-K filed February 12, 1999. Cited figures are marked; the original filing is the authoritative source.
3M's 1998 10-K shows a year of strain: net sales were essentially flat at $15.02 billiona (vs. $15.07 billion in 1997), with currency translation cutting sales roughly 3 percent and Asian and Latin American economic weakness weighing on volumes.
Reported net income fell to $1.175 billionb, or $2.88 per diluted share, from $2.121 billion ($5.06) in 1997, which included a large $803 million divestiture gain on National Advertising Company. Excluding the 1998 restructuring charge ($493 million pre-tax), the extraordinary debt-refinancing loss, and the 1997 gain, earnings per diluted share declined about 3.6 percent to $3.74 from $3.88. Operating margin excluding restructuring fell to 16.9 percent from 17.7 percent, and return on invested capital dropped to 15.9 percent.
Management is taking action: a restructuring plan will eliminate about 4,500 net positions by year-end 1999 and is expected to yield roughly $250 millionc in annual pre-tax savings, and 1999 capital spending is expected to fall about 10 percent. Management guides to 4 to 5 percent local-currency sales growth in 1999 and says it expects earnings growth to resume, though it cautions that the economic turmoil in various regions is hard to predict. The key investor risk is the breast implant litigation.
3M has accrued $137 milliond in remaining liabilities against a minimum probable total of about $1.1 billion, while carrying $767 million in insurance receivables that are substantially contested by carriers. The outcome of the Minnesota occurrence-insurance litigation could materially affect future earnings. The company also raised its quarterly dividend to $0.56 (an annual rate of $2.24), extending a 41-year streak of annual increases, and it approved a repurchase of up to 12 million shares.
02—Key points
Key Highlights
- Net sales were flat at $15.02 billion in 1998 versus $15.07 billion in 1997; worldwide volume grew about 2 percent, but currency translation reduced sales by about 3 percent.
- Reported 1998 net income was $1.175 billion ($2.88 per diluted share), down from $2.121 billion ($5.06) in 1997, which included an $803 million pre-tax divestiture gain. Excluding one-time items, EPS was $3.74, down 3.6 percent.
- A $493 million pre-tax restructuring charge ($313 million after tax) was recorded, with about 4,800 employees to be terminated by the end of 1999 and roughly $250 million in expected annual pre-tax savings.
- Breast implant litigation remains the principal legal overhang: $1.1 billion minimum probable liabilities, $963 million paid to date, $137 million accrued, and $767 million in insurance receivables largely contested by carriers.
- Long-term debt rose to $1.614 billion from $1.015 billion as management moderately increased financial leverage to lower its cost of capital; total debt was 34 percent of total capital.
- Operating cash flow from continuing operations was $2.374 billion, up from $1.818 billion, while capital spending was $1.430 billion and share repurchases were $618 million.
- The February 1999 quarterly dividend increase to $0.56 per share (annualized $2.24) marks the 41st consecutive year of dividend increases.
03—Questions
Frequently Asked Questions
Why did 3M's reported earnings fall so sharply in 1998?
Most of the decline reflects non-recurring items: the 1997 results included an $803 million pre-tax gain ($495 million after tax) from selling National Advertising Company, while 1998 included a $493 million restructuring charge and a $38 million after-tax extraordinary loss from refinancing ESOP debt. Excluding these items, 1998 EPS was $3.74 versus $3.88 in 1997, a decline of about 3.6 percent driven mainly by the strong U.S. dollar and weak international economies.
How significant is the breast implant litigation for investors?
It is a meaningful but quantified risk. As of year-end 1998, 3M had paid $963 million in defense and settlement costs, and it carried $137 million in remaining accrued liabilities against a minimum probable cost of about $1.1 billion. It also held $767 million in insurance receivables that most carriers contest. If the Minnesota occurrence-insurance litigation goes against 3M, the company could lose significant coverage, which could cause material charges to net income in the period recorded.
What is management's outlook for 1999?
Management expects local-currency sales growth of 4 to 5 percent, with U.S. sales up 3 to 4 percent and international local-currency sales up 5 to 6 percent. It anticipates resuming earnings growth in 1999 through volume gains, new products, productivity, and expense control. Currency effects are expected to be minimal, capital spending is expected to fall about 10 percent, and the company warns that the impact of economic turmoil around the world is hard to predict.
Is the dividend safe, and what is the company doing with its capital?
3M raised its quarterly dividend to $0.56 per share in February 1999, equal to an annual rate of $2.24, marking 41 consecutive years of increases. Total 1998 dividends were $887 million, or $2.20 per share. The company also repurchased $618 million of stock in 1998 and authorized up to 12 million additional shares for repurchase through year-end 1999. Free cash flow from operations, $2.374 billion less $1.430 billion in capital spending, comfortably covers the dividend.
What drove the 1998 restructuring and what are the expected benefits?
The restructuring was designed to reduce costs and improve productivity in a difficult year marked by currency headwinds and weak international markets. The $493 million charge includes $271 million for employee termination benefits, $143 million of asset write-downs, and $79 million of inventory write-downs and exit costs. The plan involves exiting certain product lines, consolidating manufacturing sites, and reducing corporate functions, with the company expecting about $250 million in annual pre-tax savings once fully implemented by the end of 1999.
04—Continue