01—Abstract
Summary
Summary of the 10-K filed February 18, 2000. Cited figures are marked; the original filing is the authoritative source.
3M's fiscal 1999 10-K shows a company that delivered higher earnings on slightly higher sales.
Net sales rose 4.3% to $15.659 billiona (volume up 5%, with a stronger U.S. dollar trimming about 1%). Operating income reached $2.956 billion, and net income rose to $1.763 billion, or $4.34 per diluted share, versus $2.88 in 1998 (which included a large restructuring charge). Excluding non-recurring items, diluted EPS was $4.21, up 12.6% from the prior year's comparable figure, and return on invested capital improved to 18.6%.
Operating cash flow was strong at $3.038 billion, and total debt fell to $2.610 billionb from $3.106 billion, with debt at 29% of total capital versus 34% a year earlier. The company also raised its quarterly dividend to 58 cents, marking the 42nd consecutive year of increases. The main investor overhang is the breast implant litigation.
3M has accrued about $1.2 billionc in estimated probable liabilities against $1.114 billion already paid, leaving $86 million accrued, and it carries $622 million in insurance receivables that are substantially contested by carriers. A Minnesota insurance coverage trial was expected to reach a verdict around February 2000. Management believes the coverage outcome will be favorable and that further charges, if any, would not be materially adverse to financial position, though they could hit a given quarter's net income.
Separately, a $73 milliond charge was taken for the LePage's antitrust verdict, which management expects to be overturned. Looking ahead, 3M guides to 2000 worldwide local-currency sales growth of 6 to 7 percent, driven mainly by volume, and expects solid profit growth. Restructuring from 1998 is substantially complete and is expected to yield about $250 million in annual pre-tax savings.
Capital spending is projected at $1.0 to $1.1 billion, and the company is pursuing acquisitions including Quante AG in telecom. Key watch items for investors are the insurance litigation outcome, the pace of the 2000 volume recovery in Asia and Latin America, and price pressure in the Electro and Communications segment.
02—Key points
Key Highlights
- Net sales of $15.659 billion in 1999, up 4.3% from $15.021 billion, with volume growth of 5% and a roughly 1% drag from the stronger U.S. dollar.
- Diluted EPS of $4.34 on net income of $1.763 billion, versus $2.88 in 1998, which was depressed by a $493 million restructuring charge. Excluding non-recurring items, diluted EPS was $4.21, up 12.6%.
- Operating cash flow of $3.038 billion, up from $2.374 billion, supporting debt reduction (total debt down to $2.610 billion from $3.106 billion) and $825 million in share repurchases.
- Breast implant litigation: about $1.2 billion in estimated probable liabilities, $1.114 billion paid to date, $86 million accrued, and $622 million in contested insurance receivables; Minnesota coverage trial verdict expected around February 2000.
- Dividend increased to 58 cents per quarter ($2.32 annualized), the 42nd consecutive year of dividend increases.
- Fastest-growing segment was Electro and Communications, with sales up 15.7% and operating income up 54.3%; Asia Pacific sales rose about 22% with operating margin of 26.6%.
- 2000 guidance calls for worldwide local-currency sales growth of 6 to 7 percent, with the 1998 restructuring program expected to yield about $250 million in annual pre-tax savings.
03—Questions
Frequently Asked Questions
How did 3M's underlying profitability trend in 1999?
Excluding non-recurring items, operating income rose to $2.856 billion, up 12.9%, and operating margin improved to 18.2% from 16.9%. Gross margin benefited from volume gains and restructuring, and SG&A held at 25.2% of sales. Return on invested capital rose to 18.6% from 15.9%.
What is the main legal risk facing 3M shareholders?
The breast implant litigation is the key exposure. 3M has paid $1.114 billion against an estimated $1.2 billion total liability and carries $622 million in insurance receivables, most of which the carriers contest. A Minnesota insurance coverage verdict was expected in February 2000. If insurers prevail, 3M could lose significant coverage, and future charges could hit quarterly net income, though management considers a material adverse effect on financial position unlikely.
Is 3M's balance sheet and cash flow generation healthy?
Yes. Operating cash flow reached $3.038 billion, debt declined to 29% of total capital from 34%, the current ratio improved to 1.6, and inventory fell 9%. Capital spending dropped about 27% to $1.039 billion, and 3M expects $1.0 to $1.1 billion in 2000.
What did 3M's 1998 restructuring and 1999 divestitures mean for results?
The 1998 restructuring charge of $493 million was largely offset in 1999 by $100 million in net non-recurring gains from divestitures such as Eastern Heights Bank and cardiovascular systems. The program is substantially complete, cut more than 5,000 positions, and is expected to save about $250 million a year pre-tax, with about $60 million of incremental benefit in 2000.
What is management's outlook for 2000?
3M expects worldwide local-currency sales growth of 6 to 7 percent, driven mainly by volume, with U.S. growth near 6 percent and international growth of 7 to 8 percent. Pricing is expected to have minimal overall impact, though price declines in Electro and Communications may limit that segment's operating income growth. The company also plans potential acquisitions, including Quante AG.
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