MMM

3M Company (Minnesota Mining and Manufacturing Company) - 1997 Annual Report Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 1997. 3M is a diversified technology company organized into two primary sectors: Industrial and Consumer, and Life Sciences. The company operates globally with 75,639 employees as of year-end 1997. A significant strategic event in 1997 was the sale of National Advertising Company, an outdoor advertising subsidiary, which generated a substantial one-time gain. The company also continues to manage significant legal contingencies related to breast implant litigation.

Key Financial Metrics

Margins: Operating income margin was 17.7% in 1997, up from 17.5% in 1996. Cost of goods sold was 57.0% of sales. Selling, general, and administrative expenses were 25.3% of sales.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 5.9% to $15.07 billion. U.S. sales rose 9% driven by volume, while international sales grew 3% despite a 13% volume increase, as the strong U.S. dollar reduced reported sales by approximately 9%.
• Profitability: Income from continuing operations rose 40% to $2.121 billion. This increase was significantly driven by an $803 million pre-tax gain ($495 million after-tax) from the sale of National Advertising Company. Excluding this gain, per-share income increased 8.5%.
• Debt and Capital Structure: Total debt increased to $2.514 billion (30% of total capital) from $1.968 billion (24% of total capital) due to increased share repurchases and debt issuances. The company repurchased $1.693 billion of common stock in 1997.
• Currency Impact: The strong U.S. dollar negatively impacted results, reducing worldwide operating income by an estimated $189 million and income from continuing operations by $112 million.

Guidance, Outlook, and Risks

Outlook: Management expects solid sales and earnings growth in 1998. However, the strong U.S. dollar is expected to reduce 1998 earnings by more than $0.25 per share, with the largest impact in the first half of the year. The company does not expect earnings contributions from Asia in 1998 due to regional economic turmoil. Capital spending is expected to remain around $1.4 billion.

Risks and Contingencies:

• Breast Implant Litigation: As of December 31, 1997, 3M was a defendant in 7,547 lawsuits involving 26,193 claimants. The company has accrued $292 million in liabilities and $666 million in receivables for insurance recoveries (substantially all contested). While the company believes insurance coverage is sufficient, unfavorable rulings in insurance litigation could materially impact net income.
• Year 2000 Issue: The company estimates remaining incremental costs of $55 million to remediate systems. Failure to convert systems or third-party failures could have a material adverse effect on operations.
• Legal Proceedings: Beyond breast implants, the company faces various environmental and product liability claims. While current accruals are deemed reasonable, future charges could impact quarterly net income.
• Credit Rating: In February 1998, Moody's and S&P downgraded 3M's long-term debt rating (from Aaa/AAA to Aa1/AA) due to the outlook for continued growth in leverage resulting from share repurchases and debt issuance.

Investor Verification Checklist

• Divestiture Gain: Verify the sustainability of earnings by excluding the $495 million after-tax gain from the National Advertising Company sale.
• Insurance Recovery: Monitor the status of the $666 million accrued receivable for breast implant insurance recoveries, as it is contested and subject to litigation outcomes.
• Currency Sensitivity: Assess the impact of the strong U.S. dollar on future international revenue and profit margins.
• Debt Levels: Review the increase in leverage (debt to 30% of capital) and the associated interest expense increases projected for 1998.
• Share Count: Confirm the reduction in shares outstanding due to the $1.693 billion repurchase program and its effect on future EPS.