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3M's third quarter a strong one
by Andrew Haeg, Minnesota Public Radio
October 21, 2002

3M reported strong third-quarter earnings, due to cost-cutting and stronger sales in the Asia-Pacific region. Company officials say, despite the improved results, they don't yet see any rebound in the global economy.

The Maplewood-based manufacturer earned $545 million in the third quarter, up 26 percent from a year ago.

As they have in quarters past, 3M officials partly attributed their success to a program called Six Sigma. Under Six Sigma, employees learn how to eliminate waste and unpredictability. As a result, 3M's expenses have declined over the last several months while revenues have held steady. Profits are up even when sales are not.

"Six sigma continues to drive costs out of our factories," said Company Chief Financial Officer Pat Campbell, "by optimizing manufacturing, deferring new capital investment, and reducing variability in our business processes."

Company officials have credited Six Sigma for helping 3M buck the economic downturn over the past two years. The company's stock price has risen 38 percent since the fall of 2000, compared to a two percent decline in the Dow Jones Industrial Average.

Alfred Marcus is a professor of strategic management at the University of Minnesota's Carlson School of Management.

"3M's relative success is not so much a result of expanding sales," Marcus said. "Sales are about flat. It's really about operational efficiencies and the fact that they have not seen a decline in overall sales."

This past quarter, 3M turned in a strong performance despite a meager 0.1 percent rise in domestic sales. A 19 percent jump in sales to the Asia-Pacific region offset weak domestic performance.

Factor out Japan, where 3M's sales only grew 10 percent, and sales in Asia grew by 28 percent. The numbers are further evidence that Asia's economies are the fastest growing in the world.

"Unfortunately, those gains are not going to continue because economic activity in Asia has already begun to slow down," said Sung Won Sohn, Chief Economist at Wells Fargo Bank.

He says growth in Asia has come from two primary sources: sales to the United States and massive government stimulus packages.

Sohn says exports from Asia to the U.S. are slowing. He says Asian governments are also cutting back on stimulus for fear of inflation and real estate speculation.

Sohn says sales of U.S.-made products to Asia will grow more quickly than those to the rest of the world, but not as quickly as they have been growing.

"I would assume that it would be pretty difficult to rack up another 20 to 25 percent gain in sales in the future," Sohn said.

3M officials expect fourth quarter earnings to be in the middle range of analysts' expectations. They say the continuing weak economy requires caution.

One sign of that caution is 3M's continued low level of capital expenditures. Manufacturers spend money on new capital equipment if they think demand for their products will grow appreciably.

3M CFO Pat Campbell says the company will start buying more capital when signs point to a rebound in global economies.

"We're coming through a period where most of the economies are not performing that well from a growth standpoint," Campbell said. "So we haven't had to invest that much money this year for growth. But as the economies come back and we see some more growth opportunities, it would take that number back up."

Wells Fargo's Sohn says the reluctance of 3M and other companies to buy new equipment is a further sign that an economic rebound isn't yet in sight.

"They are not willing to hire people," Sohn said. "They are not willing to spend money on ball bearings, pickup trucks and computers and replace machinery for example. Until and unless we see business confidence recovering, I think the economic cinditions will remain fairly sluggish."

3M's sales for the third quarter came in at $4.1 billion, up five percent from last year.

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